Ottawa to Pittsburgh: Cybersecurity, Pennsylvania's Flat 3.07%, and Local Wage Tax

Pittsburgh's cybersecurity firms, its defence research labs, and Carnegie Mellon's Software Engineering Institute recruit Ottawa's cybersecurity and defence professionals. The move is a large tax cut: Ontario's combined top rate of about 53.5% becomes about 43% inside Pittsburgh or about 41% in the suburbs.

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 a 3% local earned income tax on Pittsburgh residents; 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 7% 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. 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.

Pittsburgh's side

Pennsylvania's flat 3.07% state income tax; a 3% local earned income tax on Pittsburgh residents (1% city plus 2% school district), with most suburbs charging 1%; 7% sales tax in Allegheny County; property tax among the higher effective rates in the US, near 2% in Allegheny County after recent reassessments; 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

CSE and DND cybersecurity professionals to Carnegie Mellon's Software Engineering Institute and Pittsburgh's security firms, Ottawa defence engineers to the region's research labs and contractors, federal IT staff to PNC and the banks' technology groups, and Ottawa academics to Carnegie Mellon and Pitt.

Worked example

An Ottawa cybersecurity engineer moves to Pittsburgh on August 31 with $150,000 of unrealized gain in a non-registered account, $450,000 in an RRSP, and a Kanata 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. Federally deferred; Pennsylvania position documented.
• Pittsburgh. State 3.07% plus 3% local. Combined top rate about 43%. HST 13% becomes sales tax 7%.

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

The city earned income tax is levied at a rate of 1% on the wages or net profits earned by City residents. The City also receives a portion of the Earned Income Tax assessed by the Pittsburgh Public Schools equal to 2%. — City of Pittsburgh, Earned Income Tax, https://www.pittsburghpa.gov/City-Government/Finance-Budget/Taxes/Tax-FAQs

Practitioner note

Pittsburgh's local earned income tax is 3% inside the city and about 1% in most suburbs; on a $200,000 salary that is $4,000 a year. We run the local tax and Allegheny County property tax by municipality before the client picks a neighbourhood.

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 Pittsburgh clients. See cross-border pricing or book a call.