How Does OBBBA Affect Canada-US Individuals Tax Comparisons?

This second piece of a two-part series analyzes the Code provisions for individuals and personal tax matters affected by the One Big Beautiful Bill Act and their Canadian counterparts. In the prior commentary, I noted that comparing Canadian and American tax laws can be informative, instructive, and interesting and that in many areas they are quite similar but in others not so much, and examples of each were provided. Nathan Boidman, How Does OBBBA Affect Canada-US Business Tax Comparisons?, Tax Mgmt. Int’l J. (Oct. 30, 2025). That commentary went on to deal with how the enactment of the One Big, Beauiful Bill Act affected the comparison of those aspects of the Code’s corporate and business tax provisions amended or affected by the act to their counterparts in Canada.

Individual Tax Rates

US Taxation. US individuals are subject to an effective combined rate of federal, state, and city taxes on income that sometimes combine the separate rates, sometimes fully integrates them, and other times falls somewhere between the two. OBBBA moves the results from the first category toward the other two.

Before the 2017 Tax Cuts and Jobs Act,there was full integration in the sense that state and local (city) taxes (SALT) of individuals were fully deductible in determining the taxable income base to which the federal tax rate applied. The TCJA, however, restricted SALT deductions to $10,000 and moved individual taxation to mainly a non-integrated rate. Now OBBBA moves the needle back, in part, to the pre-TCJA situation by increasing the $10, 000 to $40,000 for years through 2029. The $30,000 increase is phased out starting when the gross income of individual or joint filers exceeds $500,000.

Separately, notwithstanding Democrats’ policy objectives, the Republican-proposed OBBBA does not reverse the TCJA decrease of the maximum individual tax rate from 39.6% to 37%.

Some states, such as Florida, have no state or local income tax on individuals, and some (e.g., California and New York City) have rates in excess of 13%.

High-income individuals in Florida face a maximum overall personal tax rate of 37% on ordinary income (see capital gain section below ) but in high-taxing states, when the SALT deduction is only $10,000, the overall effective rate may approach 50%.

Canada Taxation. In Canada, the system for individuals is simpler but generally produces higher maximum overall rates of tax on ordinary income—about 54% in Canada’s two largest provinces, Ontario and Quebec. The rate combines the federal government rate and one for a relevant province without the provincial tax reducing the base for federal purposes.

Flow Through Structures

US Taxation. Historically, US individuals carried on a trade or business directly, through a partnership, through an “S” Corporation, or more recently through an LLC, and not through a C corporation, to avoid the higher tax rates of the latter.

Although the TCJA reduction of the C corporation rate from 35% to 21% and the prior introduction of the 20% rate for dividends from C corporations (23.8% with Obama health care tax) took a lot of the sting out of the use of a C corp, the TCJA provided those who continued to use direct and flow through structures with a sweetener (qualified business income deduction) .

The QBI deduction provided for years to 2O25 a deduction from the taxable income earned through a flow through an amount equal to 20% of qualified income (excluding certain professional income) with a number of limitations.

OBBBA now makes this QBI deduction permanent, with some changes to the limitations.

Canada Taxation. Canada has no equivalent to the QBI but takes “double“ taxout of use of corporations by individuals to carry on business through other means, including lower taxes on dividends and undistributed profits.

Carried Interests

US Taxation. The favorable US tax treatment (capital gains taxation)accorded managers of investment partnerships who are compensated for their services mainly by allocations (generally about 20%) to special interests they own in the partnership of items of partnership income and gains has been controversial and under attack for several years.

Notwithstanding substantial industry concerns, nothing in OBBBA changed the status quo.

Canada Taxation. Canada basically has the same approach to carried interests as the US.

Capital Gains

US Taxation. US individuals pay federal tax of 23.8% (20% plus Obama health care of 3.8%) on long-term capital gains. Notwithstanding calls from the prior Biden administration to substantially increase the rates for certain high-income earners and high-net-worth individuals, no changes were made in OBBBA.

Therefore, overall rates on capital gains range from 23.8 % for individuals in states like Florida to more than 36% in states like California and New York (13.3% and 14.4%, respectively).

Canada Taxation. Canada takes a different systemic approach—simply applying the regular rates to half the gain—to produce net rates of roughly 27% in the two largest provinces.

Canada, like the US, has seen initiatives to increase tax on capital gains. In spring 2024, the government announced an increase in the capital gains inclusion (in income) rate from half to two-thirds. That would have increased the top net rate on gains in Ontario and Quebec from 27% to 36%. But the proposal was met with a strong backlash and was subsequently withdrawn.

Finally, a movement to tax individuals on a mark-to-market basis in respect of investment property was not adopted by OBBBA. Canada has no such rule for individuals.

Estate and Gift Taxes

US Taxation. When a US individual transfers, during lifetime, property by inter vivos gift or transfers property at death by testamentary will, a tax may arise in the first case under the gift tax rules of the Code, and in the second case, under the estate tax rules of the Code.

The maximum rates for either is 40%, and that was not changed by OBBBA. Prior to OBBBA, the first $13,990,000 of intervivos or testamentary gifts was exempt from these taxes. OBBBA increased the exemption to $15 million and indexed it for inflation.

The basis of property transferred is stepped-up to fair market value. There was some lobbying to abolish the step-up but that was rejected as was lobbying to adopt a net wealth tax .

Canada Taxation. Canada does not have a conventional gift or estate tax but deems property transferred by intervivos or testamentary instrument to have been disposed of at fair market value for capital gains tax purposes.

In both countries, tax otherwise arising under the foregoing rules can be deferred by leaving property to a surviving spouse or trust for such spouse.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Nathan Boidman, retired Canadian attorney and CPA, specialized in Canada-US taxation and is now founding a non-profit Canada-US taxation center.

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