Ottawa to Chicago: Defence, Consulting, and Illinois's Flat 4.95%

Ottawa's consultants, defence engineers, and federal program managers have a large market in Chicago's corporate headquarters and consulting offices. The move is a large tax cut: Ontario's combined top rate of about 53.5% becomes about 42% in Illinois, with no city income tax. The Ontario side carries the departure tax, the OHIP wind-down, and any federal pension.

Key takeaways

• Ontario's roughly 53.5% top rate, including the provincial surtax, sets the departure tax. On a $300,000 unrealized gain, about $80,000.
• Illinois's flat 4.95% income tax; no city income tax in Chicago.
• A Canadian public service pension paid to an Illinois resident is taxed federally with Canadian withholding capped at 15% under the treaty, and is generally exempt from Illinois tax as retirement income.
• 13% HST becomes 10.25% sales tax in Chicago.
• OHIP ends on permanent departure. Illinois has an estate tax above $4 million.

The Ontario departure

Departure tax applies to non-registered investments, private company shares, crypto, and foreign property at fair market value on the departure date. Ontario real estate, RRSPs, TFSAs, and registered pensions are excluded. Report on Form T1243, list holdings on Form T1161 if the total exceeds $25,000. The Ontario surtax ends on departure.

The federal pension in Illinois

Under Article XVIII of the treaty, Canadian tax on periodic pension payments to a US resident is capped at 15%; file NR301 before the first post-departure payment. The US taxes the pension federally with a foreign tax credit; Illinois generally exempts it under the retirement income subtraction. CPP and OAS are taxable only in the US federally and exempt in Illinois.

Chicago's side

Flat 4.95% state income tax; no city income tax; 10.25% sales tax; property tax near 2% effective in Cook County; estate tax above $4 million with rates to 16%.

The RRSP in Illinois

Federally deferred under the treaty and deferred for Illinois. RRIF income later is generally exempt from Illinois tax as retirement income. 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

Ottawa consultants to the Chicago offices of the large firms, DND and CSE engineers to Chicago's defence and aerospace employers, federal program managers to corporate headquarters, and Ottawa policy professionals to Chicago's think tanks and universities.

Worked example

A retired federal manager and spouse move to Chicago on September 30 with a $45,000-a-year public service pension, $160,000 of unrealized gain in a non-registered account, $550,000 in RRSPs, and a Westboro home sold in the departure year.

• Departure tax. $160,000 gain, $80,000 taxable, at about 53.5%: roughly $43,000.
• Pension. NR301 filed; 15% Canadian withholding; taxed federally with a foreign tax credit; exempt in Illinois.
• RRSP. No tax on departure; RRIF income later exempt in Illinois.
• Home. Sold as a resident under the principal residence exemption.
• Chicago. No Illinois tax on pension or RRIF income. HST 13% becomes sales tax 10.25%.

Official sources

"Pensions may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of a periodic pension payment, the tax so charged shall not exceed 15 per cent of the gross amount of such payment." — Canada-United States Tax Convention, Article XVIII(2)(a), https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997.html

"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

Practitioner note

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

See also: Weighing Florida instead? See the Canada-to-Florida guide, or the same city's Ottawa to Miami guide.

Next step

Fairlight prepares the Ontario departure return, the pension withholding paperwork, and the first-year federal and Illinois returns. See cross-border pricing or book a call.