Comparison: Business Taxes in North America

Talent is usually the first consideration, regardless as to whether the company operates in manufacturing or technology. The reality is that the potential for success is zero without great workers. After that, we often hear about ecosystem strength, supply chain and logistics, as well as overall cost.

In that big picture, taxes are just one small part of the expansion decision. In our experience, it’s one of the last questions a company will seek to answer.

That doesn’t mean tax isn’t important. Tax can result in a significant ongoing cash burden for the company, resulting in costs ranging from thousands, or millions, depending on the size and type of business. It isn’t always easy to find tax information in one place. It’s rarely presented for the sake of comparison – certainly not across borders. Well, Waterloo EDC has you covered.

Here’s a comparative look at business taxes in North America:

What are business taxes?

First, what are we talking about when we say “business taxes” in North America? Well, it can get complex if you start calculating tariffs, excise taxes and other charges that are often industry- or company-specific. The more general (and comparable) taxes fall into three categories: corporate income taxes, payroll taxes and sales taxes.

Corporate income tax is exactly what you’d expect – a tax on your company’s income in a given year. Like personal income tax, it’s a set percentage of your adjusted net earnings. As with personal income tax, the rate may differ depending on your company’s earnings or size. Some of these taxes may be offset by deductions offered for business expenses, though that’s far more complicated (and probably requires that you get in touch with an accountant).

Payroll tax is the mandatory contribution your company must make to employment insurance, social security, pensions and workers compensation on behalf of your employees. Like income taxes, it can scale upwards based on the size of your workforce.

Sales tax is the value-added tax that applies to all goods bought or sold by individuals or companies within a given jurisdiction. Sales taxes in Canada for the most part is structured like a typical value added tax system with businesses charging taxes on sales of goods and services and claiming an Input Tax Credit (ITC) to recover sales tax they paid with the net balance being remitted or paid on filing. In certain instances, goods or services acquired or imported into Canada for use can result in imputed sales taxes; however, provided the Canadian company is registered, such taxes may be managed and should generally not result in an out-of-pocket cost. In certain provinces, sales taxes are levied more like a classic sales tax with exemptions for business-to-business commercial activity.

How do corporate income taxes in Waterloo compare with other North American jurisdictions?

Good question! It’s not always simple to do a straight-up comparison. For example, as we mentioned, the rates differ depending on the size of your company. Also, some jurisdictions include all kinds of automatic deductions from the “standard” rate. For example, Canada’s “standard” corporate income tax rate is 38%, but it’s reduced to just 15% by a federal tax abatement and a general tax reduction that most companies can claim. Provincial taxes are between 10% and 11.5% (pending the nature of the activity) of the same federal base resulting in a combined effective tax rate of between 25% and 26.5%.

For the sake of simplicity, in the table below we’re only including the highest corporate rate after abatements and reductions have been applied in order to provide the simplest answer. As comparators, we’ve selected Waterloo EDC’s core markets:

It’s also important to remember that corporate income taxes can be reduced via deductions for most operating expenses, including:

• Business start-up costs
• Supplies
• Business tax, fees, licenses and dues
• Office expenses
• Salaries, wages and benefits
• Travel
• Rent

For more in-depth information about deductions, the Business Development Bank of Canada has a fantastic explainer.

How do payroll taxes in Waterloo compare with other North American jurisdictions?

Were corporate income taxes hard to compare? A little. Are payroll taxes even harder to compare? Yes.

The reason is that you don’t see the same categories of payroll tax across all jurisdictions. However, you do generally have an employment insurance (or unemployment insurance, depending on where you’re from) charge, worker’s compensation charge, health or medical care charge and in some places, employers must contribute to a pension.

These charges are all represented as a percentage of the employee’s salary. For example, if your employee is paid $50,000/year and the employment insurance charge is 5%, you will have to pay $2,500 annually for that employee.

We’ve tried to capture the total amount of payroll taxes as a percentage of your employee wages below for the average office-based employee, in a newly opened office, who makes $75,000¹ annually:

As you can see, the total amount paid in payroll tax is less for companies starting up in Waterloo versus our competitor states. While some UI payments may be lower if your company has documented low turnover over multiple years, an expansion to any one of these US locations will mean higher payroll-related costs for at least the first few years of a new operation.

It’s also important to note that additional health costs – outside the payroll charge – can be lower in Waterloo than in the United States thanks to Canada’s socialized healthcare system. Workers in Canada do not require company insurance plans to access doctors, emergency care and required surgery, though many companies provide benefits that include dental and eye care coverage.

1. We have eliminated worker compensation because its calculation is complex and occupation-specific.

2. Companies located in the US pay federal and state unemployment tax. The full federal rate is 6.0% but employers can claim up to 5.4% credit as long as all state rates are paid.

3. Waterloo percentage is an Ontario-only tax – residents of Canada do not pay additional rates for healthcare coverage outside of personal income taxes. US jurisdictions have Medicare tax, but that tax does not fund worker healthcare, which must be paid for separately through employee/employer contributions.

4. This does not include optional pension matching programs.

5. Each state has a whole bunch of additional UI-related fees, including a workforce training fund and additional medical assistance contribution, that are not included here.