Can a buyer require proof that the seller is a Canadian resident before closing?

A buyer can write a residency confirmation into the purchase agreement as something the seller must deliver at or before closing. The reason sits in the Income Tax Act. Where the seller is a non-resident, the Canada Revenue Agency can look to the buyer, not only the seller, for part of the seller’s tax. A confirmation is one way a buyer can show it asked the question before paying.

What section 116 asks of a buyer

Section 116 of the Income Tax Act deals with a non-resident who disposes of taxable Canadian property. The seller can notify the Minister before the sale, and the Act has the resulting certificate issued to both the seller and the proposed purchaser. A purchaser who acquires covered property from a non-resident, with no certificate (under subsection 116(4), or 116(5.2) for the separate categories discussed below) and no exception below, is made liable to remit a percentage of the amount by which the cost exceeds the amount fixed by the certificate, if any, and may withhold it from the price. The Act fixes the percentage and the remittance deadline; confirm the current wording with the CRA or a tax advisor.

How the buyer’s inquiry protects it

The same subsection lifts the buyer’s liability if, after reasonable inquiry, the buyer had no reason to believe the seller was not resident in Canada. A separate exception covers treaty-protected property, where the buyer concludes after reasonable inquiry that the seller is resident in a treaty country and the required notice is filed. A signed statement of residency can record that an inquiry took place, but it cannot help a buyer who has reason to doubt it.

What the rule does not reach

Subsection 116(5) is written for taxable Canadian property, a defined tax term, other than depreciable property and what the Act calls excluded property. A separate subsection, 116(5.3), covers depreciable taxable Canadian property and some other assets, so buying those from a non-resident carries its own purchaser liability. Whether an asset or block of shares falls inside is a tax question, as is price allocation, because the buyer’s liability is measured against the cost of the property. CRA notes a sales agreement can set a price for each asset, the inventory and goodwill.

Residency matters to the seller too

Residency also shapes the seller’s own tax position: CRA lists being a resident of Canada throughout the year among the conditions for the capital gains deduction on qualified small business corporation shares. Better to settle it before closing day than at the closing table.