Moving from Canada to Illinois: A Flat 4.95%, No Chicago City Tax, and Exempt Retirement Income

Chicago is the financial and corporate capital of the Midwest, and the corridor from Toronto, Calgary, and Montreal runs on banking, derivatives, consulting, and increasingly tech. Illinois's tax picture is a flat 4.95% income tax, no city income tax in Chicago, high property tax, a 10.25% sales tax in the city, an estate tax with a $4 million exemption, and one feature that matters to Canadian retirees: Illinois exempts most retirement income.

Key takeaways

• Illinois's flat 4.95% income tax; no city income tax in Chicago.
• Illinois starts from federal AGI and subtracts most federally taxed retirement income, which generally covers RRIF and pension income.
• Sales tax is 10.25% in Chicago.
• Property tax is high, near 2% effective in Cook County.
• Illinois has an estate tax with a $4 million exemption and rates to 16%.

The Canadian departure

Departure tax applies to non-registered investments, private company shares, crypto, and foreign property at fair market value on the day you leave. Canadian real estate, RRSPs, TFSAs, and pensions are excluded. Report on Form T1243, list holdings on Form T1161 if the total exceeds $25,000, and post security under Form T1244 to defer tax on illiquid assets. The rate is your province's: on a $300,000 unrealized gain, roughly $72,000 from Alberta and $80,000 from Ontario, Quebec, or BC. Provincial health coverage ends around your departure date; confirm the exact date with your plan and arrange US coverage to start the same month.

US federal side

Dual-status return in the arrival year, FBAR on Canadian accounts above $10,000 aggregate, Form 8938 above thresholds, and the RRSP treaty deferral federally. The TFSA loses its tax-free status the day you become a US person; close it before crossing. Equity compensation vesting after the move is split by working days between Canada and the US.

Illinois's side

Flat 4.95% state income tax; no city income tax; 10.25% sales tax in Chicago, 8% to 9% in most suburbs; property tax near 2% effective in Cook County with a homeowner exemption; estate tax on estates above $4 million with rates to 16%. Illinois starts from federal AGI and subtracts retirement income taxed federally, including pension, IRA, and qualified plan distributions and Social Security, which generally covers RRIF withdrawals reported as pension income and CPP and OAS.

The RRSP

Federally deferred under Article XVIII of the treaty and deferred for Illinois because the state starts from federal AGI. RRIF income later is generally exempt from Illinois tax under the retirement income subtraction; document the position in the first-year file. Canadian withholding is 25% on lump sums, 15% on periodic RRIF payments within the treaty limit, with a US foreign tax credit federally.

Who makes this move

Bay Street bankers and traders to Chicago's banks and derivatives firms, Canadian consultants to the Chicago offices of the large firms, Calgary energy traders to the CME and commodities firms, Canadian tech workers to Chicago's software and fintech employers, and Canadian retirees choosing Illinois for its treatment of retirement income.

Worked example

A Toronto trader moves to Chicago on June 30 with $300,000 of unrealized gain in a non-registered account, $650,000 in an RRSP, and a Toronto condo sold in the departure year.

• Departure tax. $300,000 gain, $150,000 taxable, at about 53.5%: roughly $80,000.
• Condo. Sold as a resident under the principal residence exemption.
• RRSP. No tax on departure; federal and Illinois deferral; RRIF income later generally exempt from Illinois tax.
• Chicago. Combined top rate about 42%. HST 13% becomes sales tax 10.25%. Property tax on an $800,000 home around $16,000.

Official sources

"When you leave Canada, you are considered to have sold certain types of property (even if you have not sold them) at their fair market value (FMV) and to have immediately reacquired them for the same amount. This is called a deemed disposition and you may have to report a capital gain (also known as departure tax)." — Canada Revenue Agency, Leaving Canada (emigrants), https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/leaving-canada-emigrants.html

Effective July 1, 2017: 4.95 percent of net income. — Illinois Department of Revenue, Income Tax Rate, https://tax.illinois.gov/research/taxrates/income.html

"You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least: 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that." — Internal Revenue Service, Substantial Presence Test, https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

Practitioner note

Illinois is one of the better states for a Canadian retiree: pension, CPP, OAS, and RRIF income are all generally exempt under the retirement income subtraction. The estate tax above $4 million is the offsetting item, and a couple with a paid-off home and two RRSPs is often near it.

Corridor guides

• Calgary to Chicago: Derivatives, Energy-to-Commodities, and Illinois's Flat 4.95%
• Montreal to Chicago: The TP-1, Three Authorities, and Illinois's Flat 4.95%
• Ottawa to Chicago: Defence, Consulting, and Illinois's Flat 4.95%
• Toronto to Chicago: Bay Street to LaSalle Street, and Illinois's Flat 4.95%
• Vancouver to Chicago: Tech, Derivatives, and Illinois's Flat 4.95%

See also: Weighing Florida instead? See the Canada-to-Florida guide. Browse every corridor by city, province, and state.

Next step

Fairlight prepares the Canadian departure return, the first-year federal and state returns, and ongoing cross-border filings. See cross-border pricing or book a call.