Ottawa to Detroit: Defence, the Auto Corridor, and Michigan's Flat 4.25% Plus City Tax

Detroit's automakers run defence vehicle programs, and the region's manufacturers and technology groups recruit Ottawa's defence engineers and federal IT staff. The move is a large tax cut: Ontario's combined top rate of about 53.5% becomes about 41.25% in most of Michigan.

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.
• Michigan's flat 4.25% plus Detroit's 2.4% city tax; most suburbs have no city tax.
• A Canadian public service pension paid to a Michigan resident is taxed federally with Canadian withholding capped at 15% under the treaty, and by Michigan subject to its retirement income deduction.
• 13% HST becomes 6% sales tax.
• OHIP ends on permanent departure.

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 Michigan

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; Michigan taxes it at 4.25% subject to its birth-year retirement deduction. CPP and OAS are taxable only in the US.

Detroit's side

Michigan's flat 4.25% state income tax; Detroit's 2.4% city income tax on residents (1.2% on non-residents who work in the city), with most suburbs (Troy, Novi, Birmingham, Ann Arbor) charging none; 6% sales tax with no local additions; property tax among the higher effective rates in the US, softened by the Principal Residence Exemption and a taxable-value growth cap; no estate tax.

The RRSP in Michigan

Federally deferred under Article XVIII of the treaty and deferred for Michigan because the state starts from federal AGI. Withdrawals face 25% Canadian withholding on lump sums, 15% on periodic RRIF payments within the treaty limit, a US foreign tax credit federally, and Michigan's 4.25%. Michigan phases in a retirement income deduction by birth year that can cover RRIF income.

Who makes this move

DND vehicle and systems engineers to the automakers' defence programs, Ottawa IT and cybersecurity staff to the automakers' technology groups, federal fleet and procurement managers to Detroit's suppliers, and Ottawa academics to the University of Michigan.

Worked example

A former DND engineer moves to Ann Arbor on August 31 with $150,000 of unrealized gain in a non-registered account, $450,000 in an RRSP, and an Orleans home sold in the departure year.

• Departure tax. $150,000 gain, $75,000 taxable, at about 53.5%: roughly $40,000.
• Home. Sold as a resident under the principal residence exemption.
• RRSP. No tax on departure; federal and Michigan deferral.
• Ann Arbor. Salary taxed at 4.25% state; no city tax. HST 13% becomes sales tax 6%.

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

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

Practitioner note

Ottawa-to-Michigan retirees should check Michigan's birth-year retirement deduction, which has been expanding and can shelter a Canadian federal pension and RRIF income from state tax. The NR301 on the pension is the item that gets missed on the way out.

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, Michigan, and city returns for Detroit-area clients. See cross-border pricing or book a call.