There are two things in life you can be sure of—death and taxes. If you’re someone who is paying taxes every month but has zero idea why or where the money is going or how they even figure out what to deduct, relax; you are not alone. In fact, more than half of Canadians don’t fully understand how taxes work. Withholding tax may be something you have never heard of, and we plan to make you an expert (or on your way to becoming one) by the end of this article. Let’s dive in and learn all about withholding tax in Canada.
What is Canadian withholding tax?
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
Who pays Canadian withholding tax?
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.
Withholding income tax
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.
Withholding income tax rates
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:
Newfoundland and Labrador
8.7% on the first $38,081 of taxable income, +
14.5% on the next $38,080, +
15.8% on the next $59,812, +
17.3% on the next $54,390, +
18.3% on the amount over $190,363
Prince Edward Island
9.8% on the first $31,984 of taxable income, +
13.8% on the next $31,985, +
16.7% on the amount over $63,969
8.79% on the first $29,590 of taxable income, +
14.95% on the next $29,590, +
16.67% on the next $33,820, +
17.5% on the next $57,000, +
21% on the amount over $150,000
9.68% on the first $43,835 of taxable income, +
14.82% on the next $43,836, +
16.52% on the next $54,863, +
17.84% on the next $19,849, +
20.3% on the amount over $162,383
15% on $46,295 or less
20% on $46,295 – $92,580
24% of $92,580 – $112,655
25.75% on more than $112,655
5.05% on the first $45,142 of taxable income, +
9.15% on the next $45,145, +
11.16% on the next $59,713, +
12.16% on the next $70,000, +
13.16% on the amount over $220,000
10.8% on the first $33,723 of taxable income, +
12.75% on the next $39,162, +
17.4% on the amount over $72,885
10.5% on the first $45,677 of taxable income, +
12.5% on the next $84,829, +
14.5% on the amount over $130,506
10% on the first $131,220 of taxable income, +
12% on the next $26,244, +
13% on the next $52,488, +
14% on the next $104,976, +
15% on the amount over $314,928
5.06% on the first $42,184 of taxable income, +
7.7% on the next $42,185, +
10.5% on the next $12,497, +
12.29% on the next $20,757, +
14.7% on the next $41,860, +
16.8% on the next $62,937, +
20.5% on the amount over $222,420
6.4% on the first $49,020 of taxable income, +
9% on the next $49,020, +
10.9% on the next $53,938, +
12.8% on the next $348,022, +
15% on the amount over $500,000
5.9% on the first $44,396 of taxable income, +
8.6% on the next $44,400, +
12.2% on the next $55,566, +
14.05% on the amount over $144,362
4% on the first $46,740 of taxable income, +
7% on the next $46,740, +
9% on the next $58,498, +
11.5% on the amount over $151,978
Reducing or increasing withholding income tax
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.
Withholding tax for non-residents
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.
Withholding tax RRSPs
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.
Filing your taxes online in Canada
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.
Formerly Simpletax, Wealthsimple Tax is an electronic tax software that allows you to easily complete your taxes online. The program is certified by the CRA. Enter all your income information, and you will instantly receive an estimate for your refund or amount owing. If you provide your banking information, the refund will be deposited into your account in about a week. Wealthsimple Tax has a straightforward pricing model, and there is also a “pay what you can” option, which technically allows you to file your taxes for free.
Read the full Wealthsimple Tax Review.
H&R Block provides Canadians four options to file taxes: file in the office with a tax expert, drop off your documents for assessment, upload and have a remote tax expert assist you, or use their free tax assessment software. H&R Block is an excellent option for Canadians that need a little handholding or have returns that may be a bit more complicated. Prices vary from free to a few hundred dollars depending on the filing method and the amount of work required to file the return.
Read the full H&R Block Review.
TurboTax is Canada’s #1 income tax software. There is a free version available, but the features are pretty limited. Depending on the complexities of your return, prices can range from $19.99 up to a couple of hundred dollars. TurboTax provides instant refund details and an accuracy guarantee. The software is also encrypted to secure your personal information reaching the CRA. If you run into issues, you can speak to an expert to guide you through filing your taxes.
Read the full TurboTax Review.
The bottom line
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.
Frequently asked questions
Withholding tax Canada calculations are based on a flat percentage of income. It can get a bit more complicated when an employer withholds too much or too little taxes, which then determines whether a person owes money at tax time, or the government owes them. The TD1 form you fill out when you begin employment tells the employer how much to withhold, and that is sent directly to the Canada Revenue Agency. If you need to change the taxes withheld by your employer, you can submit form T1213 to make adjustments.
Withholding tax is paid to the government by the payer of the income instead of the recipient of the income. In other words, the employer who withheld the taxes will pay the governing body. An employee who has taxes withheld on their paycheck is not responsible for paying the government because they never receive that money. A typical example of a withholding tax would be employment insurance (EI), Canada Pension Plan (CPP), and income taxes.
Making the most of your retirement investment requires knowing the tax rates for RRSP withdrawals. There could be times where you need to tap into that pool of money, and knowing what a withdrawal will cost can help you decide how much to take out. As soon as money is withdrawn from your RRSP account it becomes taxable income. A withdrawal of $5,000 will be charged 10%, a withdrawal of $5,000-$15,000 will be charged 20%, and withdrawals over $15,000 will be charged 30%.