Withholding tax: everything you need to know

Canadian withholding tax is income tax withheld from a paycheck. These deductions are paid to the government by the payer of the income (an employer) rather than by the person receiving the income (an employee). For example, the income taxes taken from your paycheck along with employment insurance (EI) and Canada Pension Plan (CPP) are examples of withholding taxes. They are automatically deducted from your paycheck and paid to the government without ever making it to your hands

The payer of the income is responsible for paying the withholding tax, but the recipient is the one who has the taxes withheld. This is why when you receive a paycheck, the taxes are deducted automatically. Your employer is withholding those taxes and paying the government directly on your behalf.

Income tax withholding means that your income tax is withheld from you and paid to the CRA on your behalf. It may feel like a punch in the gut when you look at your paystub and see how much money is being withheld and sent to the government; however, the process of withholding income tax makes it easier for the average person when tax season rolls around.

Income tax is grouped into two categories: provincial/territorial and federal. Each province and territory have different income tax rates, but the federal rates are the same for all Canadians. Currently, federal income tax rates are as follows:

• 15% on the first $49,020 of taxable income, plus
• 5% on the next $49,020 of taxable income (on the portion of taxable income over $49,020 up to $98,040), plus
• 26% on the next $53,939 of taxable income (on the portion of taxable income over $98,040 up to $151,978), plus
• 29% on the next $64,533 of taxable income (on the portion of taxable income over $151,978 up to $216,511, plus
• 33% of taxable income over $216,511

Provincial and territorial income tax rates for tax year 2021 are as follows:

When you file your taxes, one of two scenarios happens: you either receive a payment from the government or, in the less exciting scenario, you owe money. These situations occur because the taxes withheld on your paycheck were not completely accurate. When your taxes withheld are more than they were supposed to be, you will receive that excess of money back. When your taxes withheld are less than they were supposed to be, you will receive a bill requiring you to pay back that amount of money.

If you constantly owe the government money, you can request that your employer withhold more taxes from each paycheck. If you continually receive money back from the government, you can request that your employer withhold fewer taxes from each paycheck. Typically, people don’t ask that their taxes withheld be lowered, as receiving a refund each year from the government is a nice perk for all your hard work.

As ever, it is best to consult a CPA you trust before making requests about withholding tax.

Non-residents are not held to the exact requirements as Canadian residents when it comes to withholding tax rates. Non-resident withholding tax is a flat rate of 25%, no matter the amount. This tax rate only applies to income earned within Canada. Non-residents will not have taxes withheld on any income generated outside the country. Consult an accountant in the country that you are currently residing for your particular case.

There are tons of reasons people dip into their RRSPs before retirement. Life happens, and if an emergency or situation arises where you need money stat, sometimes your RRSP is the only option. It’s key to know that you are charged a withholding tax once you withdraw funds from an RRSP account. This amount is taken from your account directly by the financial institution where you have your RRSP. That amount then goes to the government.

Taxes are only withheld when you withdraw from your RRSP before you retire, and the amount of tax you are charged will depend on the amount you withdraw. Withholding tax of 10% applies to withdrawals up to $5,000. A 20% withholding tax is applied to withdrawals of $5,000-$15,000, and 30% is applied to withdrawals over $15,000. These fees are typical across Canada, but residents of Quebec are charged 5%, 10%, and 15%, respectively.

For non-residents looking to withdraw from an RRSP, there is a withholding tax of 25% regardless of the amount withdrawn.

Here’s where it gets sticky. Once you withdraw this money from your RRSP, it is counted as income, potentially putting you in a higher tax bracket. If you do need to withdraw from an RRSP, it should be the last option you have, as it can affect your taxes, and the fees that come along with it are steep.

There are various options to choose from when it comes time to filing your taxes in Canada. Depending on how hands-on you would like to be, there are some popular options to help simplify the annual task.

Withholding taxes seems like a simple concept, but there are some nuances that can make filing taxes feel like you’re deciphering a cryptogram. As a Canadian or someone who generates income within the country, it’s essential to know the rates you pay and how the process works to avoid any surprises when the tax man comes to collect.