Does section 84.1 apply if the seller is a non-resident of Canada?

Section 84.1 of the Income Tax Act deals with an owner who sells shares of a Canadian corporation to another corporation the owner does not deal with at arm’s length. When it applies, it limits the paid-up capital the new shares can carry and can treat part of what the seller receives as a dividend instead of sale proceeds. Whether it reaches a seller outside Canada turns on the section’s opening words.

What the section says about who it covers

Subsection 84.1(1) opens by describing a taxpayer resident in Canada, other than a corporation, who disposes of shares of a corporation resident in Canada that are the taxpayer’s capital property. The shares must go to another corporation with which the taxpayer does not deal at arm’s length, and the two corporations must be connected immediately afterwards. A seller who is not resident in Canada does not fit the residence wording.

Where non-resident sellers are addressed instead

Section 212.1 applies where a non-resident person disposes of shares of a corporation resident in Canada to another corporation resident in Canada with which the non-resident does not deal at arm’s length, and the two corporations are connected immediately afterwards. The Act refers to it alongside section 84.1 as a rule that can deem a dividend. It has its own conditions, so finding that section 84.1 does not apply is only the start of the analysis.

Section 116 and other cross-border steps

Separately, section 116 requires a non-resident who disposes of certain taxable Canadian property to notify the CRA before the disposition or shortly after it. The CRA issues a certificate of compliance once it has received the tax on any gain, or acceptable security. A non-resident corporation may also have filing duties, because the CRA says non-resident corporations have to file a T2 return in certain situations.

Why the sale needs a specialist review

Which provision applies, if any, depends on where the seller was resident at the time of the sale, how the buyer is connected to the seller, what is being sold and how the price is paid. A tax adviser with cross-border experience can test the sale against each provision before terms are agreed. Our answer on how a business sale is taxed in Canada gives the resident baseline.