Withholding tax is an employer’s tax deduction on your gross earnings which are remitted directly to the Canada Revenue Agency.
Employers face penalties for failing to pay your withholding tax or if they send your withholding tax late.
How Does Withholding Tax Work?
Generally, your earnings are stated as a gross amount when you receive an employment contract letter.
This gross amount is not what you will receive weekly, bi-weekly, or monthly.
Your employer makes certain deductions from your earnings, such as Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums, and income tax, and sends them directly to the CRA.
When you receive a paystub, you can see the amount your employer has remitted to the Canadian government.
Also, when it is almost time to file your income tax and benefit return at the end of the year, your employer will send you a T4 slip – Statement of Remuneration Paid.
The T4 slip will show your income and all the deductions your employer withheld from your income, including your income tax withheld.
Your employer will determine the withholding tax rate to use for your earnings based on your province and where you report to work.
For example, if your ’employer’s main office is in Ontario, but you work from a branch office in Alberta, your employer will use income tax rates in Alberta to calculate your withholding tax.
If your employment contract requires you to work remotely, meaning you work from home and do not have to go to an actual work office, your employer will withhold income tax based on tax rates in the province where they have their head office.
It is important to note that if you are an independent contractor, an employer will not withhold income taxes on your earnings; instead, you will pay your income taxes.
Lastly, you can use form T1213 to request from the CRA a reduction in the amount that your employer deducts from your paycheques.
RRSP Withholding Tax
Your contributions to your registered retirement savings plan are tax-sheltered and qualify for tax deductions.
Suppose you make a withdrawal from your RRSP that is not part of a Home ‘Buyer’s Plan (HBP) or Lifelong Learning Plan (LLP).
Then, the financial institution where you opened your RRSP will apply a withholding tax rate on your withdrawals and remit it directly to the Canada Revenue Agency.
The withholding tax on your RRSP withdrawal will depend on your residency and how much you withdraw.
When you make a lump-sum withdrawal from your RRSP, the RRSP provider will apply the following withholding tax rates:
- 10% (5% for Quebec) on amounts up to $5,000
- 20% (10% for Quebec) on amounts over $5,000
- 30% (15% for Quebec) on amounts over $15,000
If you transfer your registered retirement savings plan directly into a registered retirement income fund or purchase an annuity, your RRSP issuer will not withhold any tax.
RRIF Withholding Tax
Payments you receive from a registered retirement income fund (RRIF) may also be subject to withholding tax.
There is a minimum amount that you can withdraw from an RRIF every year.
If you receive payments above the minimum amount, a withholding tax will be applied on the excess amount at the source.
The withholding tax rate on an RRIF is the same rate that financial institutions apply to RRSP withdrawals.
If you receive payment from an RRIF, but you can prove that your total eligible tax credits will be more than your taxable income for the year, no withholding tax will be applied on your RRIF payments.
You can use Form TD1 Personal Tax Credits Return to show that your tax credits reduce your taxable income from all sources to zero.
Do You Get Withholding Tax Back?
When you file your income tax and benefit return, you can claim tax deductions and credits that reduce your tax liability.
If your eligible tax deductions and credits make your income tax lower than the withheld tax, then you can receive a portion of your withholding tax back as a tax refund.
On the flip side, if your income tax is higher than your withheld tax, you may need to pay additional taxes to the CRA.
Frequently Asked Questions
- What is the difference between withholding tax and income tax?
Withholding tax is the tax that an employer or financial institution withholds on your earnings and remits directly to the CRA. In contrast, income tax is a tax you pay on all your sources of income and not only your employment income or income from an RRSP or RRIF.
- Is there a withholding tax on TFSA?
There is no withholding tax on withdrawals from a tax-free savings account. Your contributions are made from your after-tax income. You can earn tax-free investment income in your TFSA. You do not pay any tax when you withdraw, and therefore there is no tax for the TFSA provider to withhold.