How does section 116 withholding work when a non-resident sells a business?

Section 116 is a collection device, not a separate tax. It puts the buyer between a non-resident seller and the CRA so that tax on the seller’s gain is secured before the proceeds leave the country. Three routes are possible, depending on the property sold and whether the CRA has issued a certificate.

Route one: a certificate before closing

If, before a proposed sale, the seller sends a notice and either pays the amount the Act specifies or furnishes security the Minister accepts, the Minister issues a certificate that fixes a certificate limit equal to the estimated proceeds. The CRA sends a copy to the buyer and says the certificate protects the buyer from further tax liability for that notice. What the seller paid is credited to the seller’s account.

Route two: no certificate at closing

Without a certificate, the buyer must remit a percentage of the cost of the property, or of the part above any certificate limit, to the Receiver General within 30 days after the end of the month of the acquisition, and may deduct or withhold that amount from what it pays the seller. A higher percentage applies to depreciable property and certain other property, so ask an adviser for current figures. A buyer who, after reasonable inquiry, had no reason to believe the seller was a non-resident is not caught, nor is one whose acquisition falls under the treaty rule in subsection 116(5.01).

Route three: nothing to withhold

Section 116 does not apply to excluded property, which includes inventory of a business carried on in Canada (other than Canadian real property, resource property or timber resource property) and treaty-exempt property, so the buyer has no section 116 liability for it. The CRA says the disposition may still result in tax payable under subsections 2(3) and 115(1).

What happens to the money

Whatever is paid or withheld is a payment on account. The CRA credits it to the seller’s account, and after the seller’s return is assessed any excess is refunded or security is released. The buyer’s own residence does not matter, because the circular says the purchaser may be a resident or a non-resident. How the price adjusts for a withholding is a term for the purchase agreement, so raise it with a lawyer early. A non-resident corporate seller files a T2 return in certain situations, the CRA says. See also the buyer’s liability if nothing is withheld.