Withholding tax is the portion of income that an employer, financial institution, or payer deducts at the source and remits directly to the government. It is a prepayment of your income taxes.
How It Works
For employees, a portion of wages is withheld each payday to cover income tax, CPP, and EI. For investment income or payments to non-residents, a withholding tax is applied before the recipient receives funds. The amount withheld is later credited against your total tax liability when you file your return.
Why It Matters
- For employees: Ensures income taxes are collected gradually throughout the year.
- For investors: Certain investment payments (like dividends from foreign companies) are subject to withholding taxes.
Final Thoughts
Withholding tax helps ensure governments receive taxes on income and investment earnings in real time. Understanding it helps individuals plan cash flow and avoid surprises at tax filing time.