A shareholder who has moved abroad sells shares of the family company to a holding company the family also owns. Domestically that is section 84.1 territory. Once the seller is a non-resident it is not — it falls under Income Tax Act section 212.1, which reaches a harsher answer using a formula containing no adjusted cost base at all.
Key takeaways
SECTION 01 OF 10
The marginal note reads Non-arm’s length sales of shares by non-residents. Subsection (1) applies where “a non-resident person disposes of shares… of a corporation resident in Canada” to another such corporation with which it “does not… deal at arm’s length”, the two being connected immediately afterwards. “Connected” borrows subsection 186(4): control, or more than 10% of the votes and of the value.
Note what is absent. Nothing requires the vendor to be an individual, nothing requires the shares to be taxable Canadian property, and there is no minimum size. Finance calls it an “anti-surplus-stripping” rule against a non-resident extracting retained earnings free of tax or inflating paid-up capital.
SECTION 02 OF 10
Subsection 212.1(3) adds deemed relationships. A non-resident is deemed not to deal at arm’s length with the purchaser if it was “one of a group of less than 6 persons that controlled the subject corporation” and afterwards one of a similar group controlling the purchaser, drawn from the first.
Paragraph (3)(b) then attributes shares. Those held by a spouse or common-law partner, a child under 18, a trust in which either is a beneficiary, or a corporation they control are “deemed to be owned… by the non-resident person”. A small personal stake alongside a family trust escapes nothing.
Treadstone Law’s illustrative case study on an estate freeze with a beneficiary abroad turns on trust distributions rather than s. 212.1, but the failure is the same in kind: the deed “had never been updated to say clearly how a distribution to a non-resident beneficiary should be handled”.
SECTION 03 OF 10
Paragraph 212.1(1.1)(a) does the work: the amount by which “the fair market value of any consideration (other than any share of the capital stock of the purchaser corporation)… exceeds the paid-up capital in respect of the subject shares… shall, for the purposes of this Act, be deemed to be a dividend”.
Two variables only. Cash, notes and every other non-share item go in on one side; the paid-up capital of the shares sold comes off. Take back nothing but purchaser shares and paragraph (a) yields no dividend, though the (b) grind applies. Take a note and the whole excess is a dividend.
It is not taxed twice: paragraph (k) of “proceeds of disposition” excludes any amount “deemed by subsection 84.1(1), 212.1(1.1) or 212.2(2) to be a dividend”.
SECTION 04 OF 10
Subparagraphs (1.1)(a)(i) and (ii) split the answer. If the purchaser controlled the non-resident immediately beforehand, the dividend is deemed paid “by the subject corporation”; otherwise “by the purchaser corporation”. That decides which company must withhold. A corporation cannot control an individual, so in the emigrant case it is the purchaser.
Subsection (1.2) closes the no-consideration gap: if none would otherwise be received, the non-resident “is deemed to receive consideration other than shares of the capital stock of the purchaser corporation” equal to the subject shares’ value less any increase in the purchaser’s share value. Budget 2016 added it.
SECTION 05 OF 10
The amount is a dividend “for the purposes of this Act”, so subsection 212(2) charges it: “Every non-resident person shall pay an income tax of 25% on every amount that a corporation resident in Canada pays or credits… (a) a taxable dividend… or (b) a capital dividend.” Subsection 89(1) defines a taxable dividend as any dividend but an elected capital dividend.
Collection runs through section 215. A payer that fails to withhold “is liable to pay as tax… the whole of the amount that should have been deducted or withheld”. As Treadstone Law puts it, the Canadian payer “is legally responsible for withholding and remitting”.
A treaty reduces the rate, rarely to nothing. Article X(2) of the Canada–US convention caps it at 5% “if the beneficial owner is a company which owns at least 10 per cent of the voting stock”, and 15% “in all other cases”. An individual is not a company.
SECTION 06 OF 10
Paragraph (1.1)(b) operates whether or not a dividend arises. Where the transaction would otherwise create paid-up capital in the purchaser, the increase is cut back to the subject shares’ paid-up capital less the non-share consideration. Issuing shares with a large stated capital for shares with a small one manufactures no tax-free repatriation channel.
Nor is the suppression temporary. “Paid-up capital” in subsection 89(1) is computed “without reference to” the Act except a list including “sections 212.1 and 212.3”, so the grind travels with the shares. The rule, in Finance’s words, “can result in a deemed dividend… or can suppress the PUC”.
It is also why paid-up capital is usually the smaller number: PUC, as Treadstone Law’s explainer puts it, “is a tax concept tracked by the corporation itself”, while cost base “belongs to the individual shareholder”.
SECTION 07 OF 10
Section 84.1 applies to “a taxpayer resident in Canada (other than a corporation)” and subtracts “the greater of… the paid-up capital… and… the adjusted cost base”. Cost base is in the formula, which is why domestic planning fixates on protecting it.
Section 212.1 subtracts paid-up capital and stops. There is no cost-base term in subsection (1.1) at all. A non-resident who paid full value for the shares gets no credit for it, because Finance treats paid-up capital as the only figure that “can be returned to shareholders free of tax”.
The second difference is exclusivity. Section 84.1 needs a vendor resident in Canada; once residence changes it is the wrong section, and an adviser on the domestic template will be confidently wrong. Treadstone Law’s note on buying through a Canadian holdco makes the general point: a holdco “changes the mechanics of your exposure rather than eliminating Canadian tax altogether”.
SECTION 08 OF 10
On ceasing residence, paragraph 128.1(4)(b) deems a disposition of each property “for proceeds equal to its fair market value” and paragraph (c) a reacquisition “at a cost equal to the proceeds”. The CRA’s Leaving Canada page puts it plainly: you are “considered to have sold certain types of property (even if you have not sold them) at their fair market value”. Shares head its list.
That feels like a settled account. Treadstone Law describes it accurately — the deemed sale and reacquisition “resets your cost… going forward” — and notes that private company shares “get caught by the same deemed disposition rule as any other capital property”. Its wider overview does not reach s. 212.1.
The trap is that the reset is a cost base reset, and s. 212.1 never reads cost base. An emigrant who paid departure tax on the full accrued gain, then sells those shares to the family holdco for a note, is measured against paid-up capital — often nominal, from an incorporation decades earlier.
SECTION 09 OF 10
Section 116 is the provision people associate with non-resident sellers, and its silence reads as safety. It engages only on “taxable Canadian property”, which for unlisted shares means, under subsection 248(1) paragraph (d), that within 60 months more than 50% of their value came from Canadian real, resource or timber resource property.
Most operating companies fail that test. The CRA says so on its disposing-of-Canadian-property page: where the shares are not principally real-property-derived, “you will not be required to notify the CRA of the disposition”, and the purchaser need not withhold. Treadstone Law’s clearance-certificate note is written for real-estate closings, not share sales.
So the two point opposite ways: no certificate, no withholding, a clean closing — and a Part XIII liability on the purchaser that s. 116 would never have surfaced.
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Subsection 212.1(4) is the only relief: it disapplies the rule where a non-resident corporation sells to a purchaser that controlled it beforehand — unwinding a “sandwich”. It has never been open to an individual. Budget 2016 narrowed it after groups reorganised “with a view to qualifying for this exception”; Budget 2018 added the partnership and trust look-through rules in subsections (5) to (7).
Subsection (7) answers the obvious response to that allocation: where a beneficiary’s share turns on a discretionary power and one reason for it is “to avoid or limit the application of subsection (1.1)”, the fractions are deemed to be one.
So find the paid-up capital first — not the cost base, not the valuation. It sets the ceiling on what can leave Canada without a dividend, and is traced through every prior reorganisation. Then decide deliberately whether non-share consideration is needed at all, because that choice trades a dividend for a permanent grind.
No. Departure tax resets an emigrant’s cost base, but section 212.1’s deemed-dividend formula never reads cost base at all — it subtracts only the paid-up capital of the shares sold, so a step-up that helps elsewhere buys nothing under this section.
No. Section 116 only engages where the shares are taxable Canadian property, which most operating companies are not, so no clearance certificate is required there. But section 212.1 can still create a withholding liability on the Canadian purchaser that section 116 would never have surfaced.
Yes, but a narrow one. Subsection 212.1(4) disapplies the rule only where a non-resident corporation sells to a purchaser that already controlled it beforehand, unwinding what the article calls a sandwich structure. That exception has never been open to an individual seller.
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