Ottawa to Denver: Defence Tech, the Rockies, and Colorado's Flat 4.4%

Colorado has one of the largest aerospace and defence workforces in the US, anchored by Colorado Springs' military installations and Denver's space companies, and it recruits from Ottawa's defence and intelligence community. The move is a large tax cut: Ontario's combined top rate of about 53.5% becomes about 41.4% in Colorado.

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.
• Colorado's flat 4.4%; no percentage-based city income tax.
• A Canadian public service pension paid to a Colorado resident is taxed federally with Canadian withholding capped at 15% under the treaty, and by Colorado after the pension subtraction.
• 13% HST becomes 8.81% sales tax in Denver.
• OHIP ends on permanent departure. Defence roles may require a green card, which sets the US residency start.

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 Colorado

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; Colorado taxes it at 4.4% after the pension subtraction. CPP and OAS are taxable only in the US.

Denver's side

Flat 4.4% state income tax (TABOR surplus years can temporarily lower it); Denver's Occupational Privilege Tax is a flat few dollars a month rather than a percentage; 8.81% sales tax in the City of Denver; property tax among the lowest in the US at roughly 0.5% effective; no estate tax. Colorado also subtracts up to $24,000 of pension and annuity income for taxpayers 65 and older ($20,000 from 55 to 64), which covers RRIF and CPP income.

The RRSP in Colorado

Federally deferred under Article XVIII of the treaty and deferred for Colorado because the state starts from federal taxable income. Withdrawals face 25% Canadian withholding on lump sums, 15% on periodic RRIF payments within the treaty limit, a US foreign tax credit federally, and Colorado's flat rate after the pension subtraction.

Who makes this move

DND and CSE engineers to Colorado Springs' defence contractors and Denver's space companies, Ottawa cybersecurity staff to the region's security firms, federal program managers to Denver's corporate employers, and Ottawa policy professionals to Colorado's universities and research labs.

Worked example

A former DND engineer and spouse move to Colorado Springs on September 30 with a $40,000-a-year public service pension, $150,000 of unrealized gain in a non-registered account, $500,000 in RRSPs, and a Kanata home sold in the departure year.

• Departure tax. $150,000 gain, $75,000 taxable, at about 53.5%: roughly $40,000.
• Pension. NR301 filed; 15% Canadian withholding; taxed federally with a foreign tax credit and by Colorado after the subtraction.
• RRSP. No tax on departure; federal and Colorado deferral.
• Home. Sold as a resident under the principal residence exemption.
• Colorado Springs. Combined top rate about 41.4%. HST 13% becomes sales tax 8.2%.

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

The subtraction is generally limited to $20,000 each year or, for individuals age 65 or older, $24,000. — Colorado Department of Revenue, Social Security, Pensions and Annuities, https://tax.colorado.gov/income-tax-topics-social-security-pensions-and-annuities

Practitioner note

Colorado's pension subtraction covers a Canadian federal pension once the client reaches 55, and rises at 65. We time the pension start against the birth-year threshold so the full subtraction is available.

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 Colorado returns for Denver and Colorado Springs clients. See cross-border pricing or book a call.