A section 116 clearance certificate is the document CRA issues under ITA s. 116 confirming a non-resident vendor's tax on a disposition of taxable Canadian property has been secured — without one, the buyer must withhold and remit 25% of the gain, or become personally liable for that amount.
Under ITA s. 116(1), a non-resident vendor may notify the Minister of a proposed disposition before it happens. Section 116(2) then lets CRA issue a certificate once the vendor has paid “25% of the amount, if any, by which the estimated amount” of proceeds “exceeds” the property’s adjusted cost base, or posted acceptable security — fixing a “certificate limit” the purchaser can rely on. If no certificate is in hand, s. 116(5) makes the purchaser “liable to pay, and shall remit… within 30 days after the end of the month in which the purchaser acquired the property”, 25% of the amount by which the purchaser’s cost exceeds the certificate limit — unless the purchaser had no reason, after reasonable inquiry, to believe the vendor was non-resident.
For a buyer acquiring a Canadian target, the process is a closing-condition item, not an afterthought: shares of a private corporation deriving most of their value from Canadian real property, resource property or timber resource property are themselves taxable Canadian property, so the same certificate mechanism can apply to a share purchase, not only a direct real estate transaction. Treadstone Law’s guidance on Ontario real estate closings describes the underlying purpose plainly: a clearance certificate confirms the seller’s tax obligations on the sale have been addressed or otherwise properly secured, so the purchaser’s withholding is calculated on the actual net gain rather than the full proceeds — the same relief a buyer of a non-resident-owned target is negotiating for in a share deal. And a non-resident vendor cannot claim the lifetime capital gains exemption at all, whatever the target’s QSBC share status — the exemption is available only to Canadian-resident individuals.
A fund agrees to buy 100% of a target’s shares from a non-resident vendor for $9M against a $1M adjusted cost base — an $8M gain. At signing, no s. 116 certificate has issued. The purchase agreement requires the vendor to apply before closing; if no certificate is in hand at closing, the fund withholds 25% of the $8M gain — $2M — from the purchase price under s. 116(5) and remits it to CRA within 30 days after the month of closing, rather than paying the full $9M and being personally on the hook for the withholding itself.
See also: Qualified small business corporation share · Share purchase agreement · Section 167 GST/HST election.
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