It’s a question we are often asked when funds are withdrawn from registered accounts. The concept of withholding tax can be understandably confusing without having a basic understanding of the tax system. Before we distinguish withholding tax from taxes payable, let’s complete Tax 101.
What is income tax?
It is a tax that the federal and provincial governments levy on world-wide income earned by individual Canadian residents and is calculated on taxable income.
How is it calculated?
All sources of income are calculated to arrive at total income. Some examples of income are: employment, business, investment, CPP, OAS, other pensions, etc.
Reduce the total income by using allowable deductions. Some examples of allowable deductions are: RRSP contributions, carrying charges, child-care expenses, net capital losses, non-capital losses, etc. There are two levels of deductions on the T1 to arrive at the taxable income.
Income taxes payable is calculated on your taxable income using graduated rates. A graduated rate system ensures that you pay a higher rate of tax on additional income earned. For example, if you have taxable income of $100,000, then your maximum taxes payable is just under $23,000. This amount is considered your balance owing.
What is a balance owing?
Most employed people will not have a significant balance owing because portions of the income tax payable are paid up-front throughout the year in the form of withholding tax. Some examples of withholding tax are: taxes taken at source from your employment income, taxes taken at source from your CPP or OAS benefits, taxes taken at source from an RRSP or RRIF withdrawal, etc.
The difference between what you paid up-front in “withholding tax” and the actual “taxes payable” (calculated on your taxable income) is your “balance owing”.
You may also be in a position where you don’t have a balance owing, but instead a “refund”.
What is a refund?
Simply put, a refund is the result of paying more income tax up-front, than what is due after calculating your taxes payable on your taxable income. In other words, the CRA is paying you back for the excess income tax you paid to them up-front.
So, to simply answer the initial question, “am I paying taxes twice?” The answer is no. You are paying up-front for the eventual tax that will have to be paid on all your taxable income for the year.
Feel free to contact your TMFG advisor for clarification or for questions about your individual tax situation.
