Withholding tax
Tax that the payer deducts from a payment and sends directly to the tax authority on the recipient's behalf.
In short
- The payer is responsible for withholding. If it doesn't, it can be liable for the tax.
- Payments to non-residents are the most common case in business, such as fees, royalties and interest.
- Tax treaties often reduce the rate, but only with the right documentation from the recipient.
Withholding tax is collected at the source. Instead of the recipient paying tax later, the payer deducts part of the payment and remits it to the government. Payroll deductions are the most familiar example, but businesses also withhold on certain payments to suppliers, especially non-residents.
In Canada
- Services performed in Canada by non-residents: the payer generally must withhold 15% of fees paid to a non-resident for services rendered in Canada, and an additional 9% for services rendered in Quebec, unless a waiver has been obtained.
- Part XIII tax: a 25% withholding applies to certain passive payments to non-residents, such as dividends, rents and royalties, and some interest, often reduced by a tax treaty.
In the United States
Payments of US-source income to foreign persons are generally subject to 30% withholding, reduced by treaty when the recipient provides the right form, such as a W-8BEN or W-8BEN-E. Domestic payees who fail to provide a taxpayer identification number can be subject to backup withholding.
Getting it right
The payer carries the risk. A business that fails to withhold when required can be assessed for the tax, plus penalties and interest. That is why residency and tax forms should be collected during supplier onboarding, before the first invoice is paid, and why payments to foreign contractors deserve a check against these rules.
Worked example
A US consultant working in Toronto
A Canadian company engages a US consultant who spends two weeks on site in Toronto and invoices $20,000. Without a waiver from the CRA, the company withholds 15%, $3,000, pays the consultant $17,000 and remits the $3,000 to the CRA with the required reporting. The consultant can then claim it against Canadian tax owing, if any, on a Canadian return.