Does section 84.1 apply if the seller is a non-resident of Canada?

The rule: the resident-equivalent section, applied to non-residents

Where section 212.1 applies, the excess of any non-share consideration received over the paid-up capital of the subject shares is deemed to be a dividend, generally paid by the subject corporation to the non-resident and subject to Part XIII withholding — a substantively similar recharacterization to what section 84.1 does for a resident seller, but triggering non-resident withholding tax rather than an ordinary domestic dividend gross-up.

When it changes

Subsection 212.1(6) extends the analysis through trusts and partnerships in the ownership chain, so a non-resident who holds shares indirectly through a trust or partnership does not automatically escape the section by interposing one. The rule also does not apply where the purchaser corporation does not remain connected to the subject corporation after the disposition — the connection test has to be checked on the post-closing structure, not just the pre-closing one.

Where this played out — Case Files

One file shows advisors having modelled section 84.1 when the vendor’s own facts put the transaction under section 212.1 instead. A second shows the same buyout structure that is a routine capital transaction for a resident child becoming a deemed dividend and a withholding problem the instant the seller has emigrated.

Sources

• • Income Tax Act s.212.1(1), (1.1) and (6) — laws-lois.justice.gc.ca.
• • Income Tax Act s.84.1(1), the Canadian-resident equivalent — cited for the contrast; see the previous question.
• • Treadstone Law — non-resident owners and the capital gains exemption — adjacent background on how non-residency affects a sale; it addresses exemption eligibility, not the section 212.1 deemed-dividend recharacterization, which is the point here.