Most people are aware of the need to pay income taxes on their earnings, but may not be as familiar with," Backup Withholding". Backup withholding is a tax that is levied on investment income, at an established tax rate, as the investor withdraws it. For payments not subject to withholding, payers are required to withhold the tax. This helps ensure that government tax-collecting agencies, such as the Internal Revenue Service (IRS) or Canada Revenue Agency, will be able to receive income taxes owed to them from investors’ earnings.
Some payments are not subject to backup withholding; however, certain payers are required to report and withhold backup withholding from certain payments made to the investor. These payments include, but are not limited to:Dividends, interest, rents and royalties paid to U.S. persons;Sale or exchange of property that gives rise to "royalties"; andPayments of U.S. source interest or dividends made by brokers or barter exchanges.The tax rate for backup withholding is generally 24%. However, the rate is 10% if the payer has been notified that the investor is entitled to a reduced rate on portfolio interest under an income tax treaty between Canada and the United States.
