Who withholds tax when a non-resident shareholder sells their shares -- the buyer or the seller?

The rule: the buyer's liability, and its two defences

Section 116 gives a non-resident vendor a route to a clearance certificate before or after closing, but the operative risk sits with the purchaser: absent a certificate, subsection 116(5) makes the purchaser liable to remit 25% of the amount by which the property’s cost exceeds the certificate limit. The purchaser has exactly two defences — a certificate, or the reasonable-inquiry standard above — and neither is automatic.

When it changes

The relevant threshold for whether private company shares fall inside the taxable Canadian property regime at all turns on a separate definitional test in paragraph 248(1)(d): whether more than 50% of the corporation’s value, at any point in the preceding 60 months, was derived from Canadian real or resource property. Shares of an operating business with little or no real estate can fall entirely outside the regime, in which case section 116 does not apply at all.

Where this played out — Case Files

One file shows one of four founding shareholders having moved to Florida years earlier, discovered in the buyer’s own diligence — and section 116 made that discovery the buyer’s problem, not just hers.

Sources

• • Income Tax Act s.116(1)–(2), s.116(4) and s.116(5) — laws-lois.justice.gc.ca.
• • Income Tax Act s.248(1), “taxable Canadian property”, paragraph (d) — the 50%-of-value-from-Canadian-real-property test; not separately quoted here.
• • Treadstone Law — why non-resident owners can't claim the capital gains exemption — adjacent background on the non-resident regime generally.