Ottawa to Philadelphia: Defence, Pharma, and the City Wage Tax

Philadelphia's defence contractors, life sciences employers, and consulting offices recruit Ottawa's defence engineers, health regulators, and federal consultants. The move is a large tax cut: Ontario's combined top rate of about 53.5% becomes about 43.8% inside Philadelphia or about 41% in the suburbs. Pennsylvania is also one of the friendlier states for a Canadian federal pensioner.

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.
• Pennsylvania's flat 3.07% plus Philadelphia's roughly 3.74% resident wage tax; suburbs charge about 1%.
• A Canadian public service pension paid to a Pennsylvania resident is taxed federally with Canadian withholding capped at 15% under the treaty; Pennsylvania exempts most retirement income after retirement age.
• 13% HST becomes 8% sales tax in Philadelphia, 6% in the suburbs.
• 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. OHIP ends on permanent departure.

The federal pension

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. Pennsylvania exempts most retirement income received after retirement age, which generally covers a Canadian federal pension; document the position in the first-year file. CPP and OAS are taxable only in the US.

Philadelphia's side

Pennsylvania's flat 3.07% state income tax; Philadelphia's Wage Tax of about 3.74% on residents (about 3.43% on non-residents who work in the city), which most suburbs replace with a 1% local earned income tax; 8% sales tax in Philadelphia (6% state plus 2% city), 6% in most suburbs; property tax near 1.4% effective; no estate tax, but Pennsylvania's inheritance tax applies at 4.5% to lineal heirs, 12% to siblings, and 15% to others, with a spousal exemption.

The RRSP in Pennsylvania

Federally deferred under Article XVIII of the treaty. Pennsylvania taxes eight classes of income rather than starting from federal AGI, and it does not tax the undistributed earnings of retirement plans, which supports deferral. Pennsylvania also exempts most retirement income received after retirement age, which can cover RRIF withdrawals; 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

DND and CSE engineers to Boeing Ridley Park, Lockheed Martin, and the Navy Yard contractors, Health Canada regulators to the pharma and biotech regulatory affairs roles, Ottawa consultants to the Philadelphia offices of the large firms, and federal retirees choosing Pennsylvania for its treatment of pensions.

Worked example

A retired federal employee and spouse move to the Philadelphia suburbs on September 30 with a $45,000-a-year public service pension, $150,000 of unrealized gain in a non-registered account, $600,000 in RRSPs, and a Nepean 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; Pennsylvania exemption position documented.
• RRSP. Federally deferred; RRIF income later generally exempt in Pennsylvania after retirement age.
• Home. Sold as a resident under the principal residence exemption.
• Suburbs. State 3.07% plus 1% local on any earned income; pension and RRIF income generally exempt. 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

Pennsylvania personal income tax is levied at the rate of 3.07 percent. — Pennsylvania Department of Revenue, Personal Income Tax, https://www.pa.gov/en/agencies/revenue/resources/tax-types-and-information/personal-income-tax.html

Practitioner note

Pennsylvania is one of the better states for a Canadian federal pensioner: the pension and RRIF income are generally exempt from state tax after retirement age. The inheritance tax is the offsetting item, at 4.5% on transfers to children, and Ontario has no equivalent.

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, Pennsylvania, and local returns for Philadelphia clients. See cross-border pricing or book a call.