How does a delayed CRA clearance certificate affect closing a business sale?

A late clearance certificate seldom ends a deal, but it forces a choice between waiting and closing with money set aside. The first step is knowing which certificate is late. The CRA certificate people usually mean is the section 116 certificate of compliance for non-resident sellers, while most clearances that gate a small business sale come from provincial bodies such as workers’ compensation boards and finance ministries.

The CRA certificate applies to non-resident sellers

Under section 116 of the Income Tax Act, a non-resident seller of certain taxable Canadian property, which includes real property in Canada, has to notify the CRA either before the sale or within a short period after it. Once the CRA has received an amount covering the tax, or security, it issues a certificate of compliance to the seller and sends a copy to the buyer.

If it has not arrived by closing day

The CRA says a buyer who does not receive the certificate must remit a specified amount to the Receiver General and is entitled to deduct it from the price. The Act has exceptions, such as a buyer who made reasonable inquiry and had no reason to believe the seller was a non-resident. The seller then receives less cash on the day, and the CRA credits what was paid to the seller’s account. The agreement can instead push the closing date back or make closing conditional on the certificate. That is a drafting choice for your lawyer.

Why certificates run late

The CRA says it will hold back a certificate if its figure for the seller’s cost differs from the one reported, and it may ask for the seller’s financial statements. It will issue a certificate based on an estimated value so a sale need not wait for an appraisal that can take several months. Notifying the CRA before the sale rather than after leaves the most room.

Provincial clearances can hold up closing too

British Columbia’s Ministry of Finance says a purchaser should hold a PST clearance certificate before buying a business. Saskatchewan’s workers’ compensation board says a buyer needs a section 156 clearance certificate to be released from the previous owner’s account, and Alberta’s board says a buyer has a responsibility to obtain a clearance. These are separate requests to separate bodies, so each has its own timing.