Section 116 of the Income Tax Act reads the wrong way round from a buyer’s point of view. The tax it collects is the vendor’s. The person it makes “liable to pay” is the purchaser. And the reliable way out is a certificate the vendor — not the buyer — has to apply for.
Key takeaways
SECTION 01 OF 10
Subsection (5) of Income Tax Act s. 116 carries the marginal note Liability of purchaser. Where a purchaser “has acquired from a non-resident person any taxable Canadian property”, then subject to three exceptions the purchaser “is 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, if any, by which (c) the cost to the purchaser of the property so acquired exceeds (d) the certificate limit”.
The liability is the buyer’s own. It does not wait for the vendor to default, and it is measured against the cost of the property rather than anyone’s profit. Nor does it go stale: CRA’s Information Circular IC72-17R6 states that “purchaser liability assessments are not subject to any time restrictions” and an assessment “may be issued at any time the CRA becomes aware that a vendor or purchaser has not adhered to the requirements of section 116”.
The charge itself sits in s. 2(3), Tax payable by non-resident persons; s. 116 is only the collection machinery, and it collects through whoever is nearest the money. As Treadstone Law’s withholding overview puts it, “the purchaser becomes personally liable to the CRA for the vendor’s tax if no certificate is issued.”
SECTION 02 OF 10
Real estate is easy: paragraph (a) of the s. 248(1) definition captures “real or immovable property situated in Canada”. Shares are conditional, and that is what share buyers miss. Paragraph (d) captures a share of a corporation “not listed on a designated stock exchange… if, at any particular time during the 60-month period that ends at that time, more than 50% of the fair market value of the share… was derived” from Canadian real property, resource or timber resource properties.
So a company whose value is contracts, people and equipment is generally outside the section — but the test is not “today”. One that owned its premises four years ago can fail on a snapshot the buyer never saw. Treadstone Law frames it for this deal type in buying from a non-resident seller, addressing “purchasing shares or certain taxable Canadian property from a non-resident seller”.
SECTION 03 OF 10
Subsection 116(6) puts excluded property outside the section entirely: listed securities, mutual fund trust units, “a bond, debenture, bill, note, mortgage, hypothecary claim or similar obligation”, and most business inventory.
It also excludes treaty-exempt property — but subsection (6.1) attaches a condition worth reading twice: “where the purchaser and the non-resident person are related at that time, the purchaser provides notice under subsection (5.02)”. CRA is explicit about the consequence: if Form T2062C “is not submitted by a purchaser who is related to the vendor, a treaty-protected property will not be considered an excluded property”. Related-party transfers are how businesses move between generations; file nothing and the route closes.
SECTION 04 OF 10
Subsection 116(1) is permissive: a non-resident proposing to dispose “may, at any time before the disposition, send to the Minister a notice” giving the proposed purchaser, the property, the estimated proceeds and the adjusted cost base. On payment of 25% of the excess of the one over the other, subsection (2) has the Minister issue a certificate “fixing therein an amount (in this section referred to as the ‘certificate limit’) equal to the estimated amount set out in the notice”.
Note what that limit equals: estimated proceeds, not the gain and not the tax. A (2) certificate does not discharge the buyer, it sets a ceiling. Pay under it and the 25% applies to nothing; pay over it — a price adjustment, an earnout — and the buyer owns the excess.
The second is different. Subsection (3) requires the vendor to notify the Minister “not later than 10 days after the disposition… by registered mail”, and subsection (4) then issues a certificate that is a complete exception under paragraph 116(5)(b). Note the name: CRA calls it a certificate of compliance, requested on Form T2062. Ask for a “clearance certificate” and you may be handed the estate one instead. As Treadstone Law explains, without a certificate “the buyer is generally required to withhold based on the full purchase price”.
SECTION 05 OF 10
Subsection (5) states 25% on the excess of cost over the certificate limit. Subsection (5.3), marginal note Liability of purchaser in certain cases, states 50% for the property listed in subsection (5.2) — “a life insurance policy in Canada, a Canadian resource property, a property (other than capital property) that is real property… depreciable property that is a taxable Canadian property”. A mixed asset deal can therefore run 25% on one part of the price and 50% on another.
The base is the price, not the profit — the costliest misunderstanding here. Treadstone Law’s answer on how much a buyer must withhold publishes no figure at all, saying it “should be confirmed directly with your lawyer or a tax advisor”. Sound advice: the figures above are what the consolidated text states today, and belong read against the section on the day.
SECTION 06 OF 10
Subsection (5) excuses the purchaser in three cases only: “after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada”; the treaty route in (5.01); or a (4) certificate issued to the purchaser.
The first is a defence about the buyer’s own conduct, and both limbs must hold — the inquiry reasonable, the conclusion genuinely available on what it produced. The vendor’s word is not obviously either. Treadstone Law is blunt in buyer liability for failing to withhold: the buyer “can become personally liable… for the amount that should have been withheld”, and that applies “even where the buyer acted on a seller’s incorrect assurance”.
The treaty route is a filing, not a state of affairs: subsection (5.02) requires notice “on or before the day that is 30 days after the date of the acquisition”, naming the vendor, the property, the amount payable and the treaty country. Miss it and the exception is gone, however good the treaty position.
SECTION 07 OF 10
Subsection (5) closes by giving the purchaser a remedy: it “is entitled to deduct or withhold from any amount paid or credited… to the non-resident person or otherwise recover from the non-resident person any amount paid by the purchaser as such a tax”.
That right is why the exposure is manageable when caught before the money moves. Withholding from consideration you still hold costs nothing; recovering from a paid-out vendor is a lawsuit, and the vendor is by definition abroad. Which is why the market answer is a holdback, not an indemnity — as Treadstone Law on closing without a certificate describes it, the buyer withholds “rather than releasing full payment at closing”.
SECTION 08 OF 10
Subsection 116(5.1), marginal note Gifts, etc., catches a disposition “by way of gift inter vivos or to a person with whom the non-resident person was not dealing at arm’s length… for proceeds of disposition less than the fair market value of the property”. It then reads the reference in subsection (5) to “the cost to the purchaser” as “the fair market value of the property at the time it was so acquired” — so a nominal price to a related non-resident produces a withholding computed on market value, in a deal where there may be no cash to withhold from.
SECTION 09 OF 10
Ask the residency question in writing, early, of the registered and beneficial vendor, and of each vendor separately where title or the share register is shared. Treadstone Law confirms this is routine: “most buyers’ lawyers will insist on exactly this”, and it is “a standard and entirely reasonable protective closing condition”.
On a share deal that is half the job. Also ask for the company’s real-property history over the trailing five years, with the dates each interest came in and went out — the evidence base for the 60-month test, and not answerable from outside. Then draft for the answer: a holdback of the statutory amount, held in trust, released on the certificate. Treadstone Law on tax holdbacks notes one “is usually paired with a tax indemnity”.
SECTION 10 OF 10
Three clocks run, and only the middle is the buyer’s: the vendor’s notice within 10 days of the disposition; the purchaser’s remittance within 30 days after the end of the month of acquisition; the treaty notice within 30 days of acquisition. The certificate runs on a fourth nobody controls — Treadstone Law on certificate timelines reports CRA processing “historically ranged from several months to over a year in some cases”, and that “a 90-day or longer closing is not unusual”.
One more risk sits in subsection 116(8): where the property is residential property as defined in the Underused Housing Tax Act, the Minister “may decline to issue the certificate” if not satisfied the non-resident’s returns under that Act are filed and taxes paid — an unrelated delinquency holding the certificate hostage while the buyer’s clock runs. As Treadstone Law’s overview puts it, the withholding “is essentially a deposit held by the government until the non-resident files a Canadian tax return”. Usually recoverable by the vendor. The exposure meanwhile is the buyer’s.
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