Withholding at the Source – What you need to know!

Taxes aren’t your friend, but you don’t want them to be your enemy either. In other words, even though taxes and the obligations that the local and national tax authorities may implement or require of businesses aren’t a “joy” to fulfill, nonetheless they are obligatory in nature – so it’s better to comply than to be made to comply.

Withholding at the source is the one obligation that all businesses and organizations have. This common denominator between both for-profit and non-profit persons, also results in both dealing with the headaches that this entails.

What are we referring too? Keep reading to find out…


What is Withholding at the Source?

Withholding at the source is a mechanism that the national tax authority uses to assure anticipated income tax payments from taxpayers, both formal and informal.

In other words, the tax authority makes use of formal businesses and organizations to both collect and then remit the income tax collected from their providers.

Many times, taxpayers feel that this is onerous obligation. Some have the sentiment that it shouldn’t be their obligation to collect other person’s taxes. In effect, there is some truth to that, but to be fair it isn’t uncommon in other countries to find similar legislation, even the United States.

Either way, the more organized a business or organization is, the easier it is to comply with this obligation.

When do I collect?

The tax code bylaws state that for purchases of C$ 1,000.00 or more the responsible taxpayer has the obligation to apply and deduct the corresponding amount for withholding from the payment to be made to the provider.

The only exception to this rule is with professional or technical services, such as those you would receive from an accountant, lawyer, architect, engineer and so on. With this group there doesn’t exist a minimum amount, so the responsible taxpayer on all payments to these providers has to withhold the corresponding amount for the payment of the services.

In relation to the persons that are subject to have withholding deducted from them, not all taxpayers are subject to this requirement. In effect, there are businesses that the tax authority has catalogued as “large contributors” and these businesses are exonerated from the withholding deduction.

How does it work?

When a registered business needs to buy something, either a service or a product, a transaction is made. This transaction is usually money in exchange for a good or service. For the buyer the purchase is an expense and for the seller the sale is income.

The national tax authority requires that at the moment of payment or when the exchange is made, that the buyer withholds a percentage of the seller’s fee or bill. To support this transaction the buyer has to give the seller an official withholding receipt.

The buyer at the end of the month will declare to the tax authority that from seller XYZ the amount of $X.XX was withheld and the buyer will then pay or transfer the amount withheld to the tax authority through the national banking system.


Not everyone likes withholding

While the majority of your providers will not have problems with you withholding their taxes for them – others will. The reasons for this are many and aren’t the subject of this article.

Nonetheless, what can you do if a provider refuses to let you withhold?

This obviously puts you in a difficult position, because the tax authority expects you as a business to withhold the tax, while on the other hand your provider is threatening to quit the job because he thinks you’re trying to get out of paying him his bill.

It helps to, before making any agreements with a provider, be sure to be clear and explain to them that you have to withhold on their payments. Also, make sure that they know that this is simply an obligation that the government obligates you to fulfill. Finally, let them know that if you can’t withhold then this increases your costs, because the tax authority will still require the payment of the tax – even if you didn’t collect from your provider. And if your costs increase then it might be necessary to use a different provider.


A few points to keep in mind about withholding taxes

As we mentioned, not every provider is subject to withholding. In fact, as per current tax legislation the tax authority has classified certain taxpayers as “large contributors”. These contributors comply with certain annual gross income requirements that in effect exonerate them from being subject to withholding.

To accredit their status as such, these taxpayers have to provide you with a letter that in effect certifies and confirms their condition as exonerated from being affected by this tax.

What are some of the taxpayers that fall within this criteria?

  • Pricesmart
  • La Colonia
  • Walmart
  • Etc…

Also, the percentages to utilize when needing to deduct from one provider to another varies. There isn’t a fixed rate or percentage to use, instead variables such as the type of entity that your provider uses and even the services or goods that your provider sells can affect what is the correct percentage to use.

Finally, the tax authority is very strict about the withholding of and prompt of withholding taxes. This is because in effect the business that withholds is in effect withholding income tax on behalf of the tax authority. To not pay, or to try and evade the obligation by dividing provider payments into individual bills less than C$1,000.00 backfire and a lot of times are very costly.

At SAENICSA | Accounting & Tax Services since 1995 we have provided accounting, tax and payroll services to our clients. If you have any questions in relation taxes or obligations that businesses need to comply with, feel free to CONTACT us.

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