Moving from Canada to Michigan: The Flat 4.25%, Detroit's City Tax, and the Windsor Corridor

Michigan is the most-crossed border in the Canada-US relationship, and the tax picture reflects it. The state has a flat 4.25% income tax and no preferential rate on capital gains, Detroit and about two dozen other cities levy their own income tax on top, property taxes run high, and a large number of Windsor residents work in Detroit without moving at all. The auto and EV corridor, the university towns, and the medical centres draw Canadians from Ontario in particular.

Key takeaways

• Michigan's flat 4.25% rate, plus Detroit's 2.4% resident city tax, gives a combined top rate near 43.6% in Detroit and 41.25% elsewhere. Ontario's is about 53.5%.
• Michigan starts from federal adjusted gross income, so the treaty's RRSP deferral flows through to the state return.
• Sales tax is 6% statewide with no local additions.
• Property taxes are high; the Principal Residence Exemption removes most school operating millage from your home.
• Canada's departure tax applies on the way out regardless of destination, and commuters who do not move are a different file entirely.

The Canadian departure

Departure tax is a deemed sale of 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 for illiquid assets. At Ontario's roughly 53.5% top rate, a $300,000 unrealized gain costs about $80,000 on the way out.

Michigan's side

• State income tax. Flat 4.25% on taxable income, computed from federal AGI with Michigan adjustments. Capital gains are taxed at the flat rate.
• City income tax. Detroit charges 2.4% on residents and 1.2% on non-residents who work in the city. Grand Rapids charges 1.5% and 0.75%; most other taxing cities charge 1% and 0.5%. Ann Arbor, Troy, and the Oakland County suburbs have no city income tax.
• Sales tax. 6% statewide. No county or city additions.
• Property tax. Among the higher effective rates in the US. The Principal Residence Exemption exempts your home from up to 18 mills of school operating tax; file the affidavit at closing. Taxable value growth is capped at inflation or 5% until the property changes hands.
• Retirement income. Michigan phases in a deduction for pension and retirement income depending on birth year; RRIF and CPP income received as a Michigan resident is treated under the same rules.
• Estate tax. None.

The RRSP in Michigan

Federally deferred under Article XVIII of the treaty. Because Michigan taxable income starts from federal AGI, the deferral flows through: no Michigan tax on RRSP growth until withdrawal. When you withdraw, Canada withholds 25% on lump sums or 15% on periodic RRIF payments within the treaty limit, the US taxes the withdrawal with a foreign tax credit federally, and Michigan taxes it at 4.25% with no credit for the Canadian withholding.

The Windsor-Detroit commuter

If you keep your Windsor home and commute, you have not moved. Days you return home the same day do not count toward the substantial presence test if you commute on more than 75% of your workdays. You file a US non-resident return on Detroit-sourced wages, pay Detroit's 1.2% non-resident city tax, and report the income on your Canadian return with a foreign tax credit. The Canadian side, not the US side, is the primary taxing authority.

Who moves to Michigan

Auto and EV engineers to the Detroit suburbs, university staff to Ann Arbor and East Lansing, medical professionals to the Detroit and Grand Rapids hospital systems, and Windsor families going from commuting to relocating.

Worked example

A Windsor engineer relocates to Troy on June 30 with $200,000 of unrealized gain in a non-registered account, $500,000 in an RRSP, and a Windsor home sold in the departure year.

• Departure tax. $200,000 gain, $100,000 taxable, at about 53.5%: roughly $53,500.
• Home. Sold as a resident under the principal residence exemption.
• RRSP. No tax on departure; federal and Michigan deferral; periodic withdrawals later at 15% Canadian withholding.
• Michigan. Salary taxed at 4.25% state; Troy has no city tax. Combined top rate about 41.25%. HST 13% becomes sales tax 6%.

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

Michigan's individual income tax rate and the list of cities that impose a city income tax are published by the Michigan Department of Treasury. — Michigan Department of Treasury, City Income Tax, https://www.michigan.gov/taxes/citytax

"Days you commute to work in the U.S. from a residence in Canada or Mexico if you regularly commute from Canada or Mexico." — Internal Revenue Service, Substantial Presence Test, https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

Practitioner note

The Michigan decision that matters is which suburb. The same salary is taxed 2.4 points higher in Detroit than in Troy, Novi, or Royal Oak. Property tax varies by district as well. We run the city and property tax by address before the client signs a lease.

Corridor guides

• Alberta to Michigan: Energy to Auto, a Flat 4.25%, and Detroit's City Tax
• BC to Michigan: Tech to Autonomous Vehicles, a Flat 4.25%, and the Property Tax Inversion
• Quebec to Michigan: The TP-1, a Flat 4.25%, and the Auto Corridor
• Calgary to Detroit: Energy to the EV Transition, and Michigan's Flat 4.25% Plus City Tax
• Montreal to Detroit: Aerospace, the Auto Corridor, and Three Authorities on the Way Out
• Ottawa to Detroit: Defence, the Auto Corridor, and Michigan's Flat 4.25% Plus City Tax
• Toronto to Detroit: Auto, the EV Transition, and Michigan's Flat 4.25% Plus City Tax
• Vancouver to Detroit: Tech, the EV Corridor, and Michigan's Flat 4.25% Plus City Tax

See also: Every Canada-to-US corridor, by city, province, and state — the full index of Fairlight moving guides.

Next step

Fairlight prepares the Ontario departure return, the first-year federal, Michigan, and city returns, and the commuter analysis for Windsor-Detroit clients. See cross-border pricing or book a call.