Withholding tax is tax deducted at source from certain payments, notably payments to non-residents, and remitted to the CRA by the payer rather than the recipient.
Withholding tax requires the payer to hold back a portion of certain payments and remit it directly to the CRA. The most common Canadian context is Part XIII tax on payments to non-residents, dividends, interest, rents, royalties and management fees, generally at 25%, often reduced by a tax treaty.
The payer, not the recipient, is responsible for withholding and remitting, and is liable if it fails to. Non-residents earning Canadian-source income, and Canadian businesses paying them, must both understand these rules, and payroll income tax withheld from employees is a domestic form of withholding at source.
A Canadian company pays a $10,000 royalty to a US resident. Absent treaty relief it withholds 25% ($2,500) and remits it to the CRA, paying the non-resident $7,500. A treaty may lower the 25% rate.
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