Is a buyer liable if it does not withhold tax from a non-resident seller?

Section 116 of the Income Tax Act puts a collection duty on the buyer when a non-resident sells certain Canadian property. A buyer who ignores it has not missed a formality: the Act makes the buyer liable to pay tax that belongs, in the first instance, to the seller. Whether it applies depends on who the seller is and what is being sold, so it is a question for the start of a deal rather than closing day.

When the rule applies

The rule covers a non-resident person disposing of taxable Canadian property, a term the Act defines. The non-resident may notify the CRA of a proposed sale and must notify it after a completed one, and the Minister issues a certificate once the non-resident has paid the tax the section specifies or furnished security acceptable to the Minister. A seller who is resident in Canada, or who is selling property outside that definition or excluded property as the section defines it, falls outside the rule, so both residency and the nature of the assets need confirming.

What the buyer owes without a certificate

Where no certificate has been issued, the Act makes the buyer liable to pay and remit to the Receiver General a percentage of the amount by which the buyer’s cost exceeds the limit on any certificate, by a deadline running from the end of the month of acquisition. A higher percentage and a separate subsection apply to certain categories, including depreciable property that is taxable Canadian property. The Act entitles the buyer to withhold the amount from what it pays the seller or otherwise recover it, which is why an unsure buyer keeps money back at closing.

The reasonable-inquiry exception

The Act relieves a buyer who, after reasonable inquiry, had no reason to believe the seller was a non-resident. That is something a buyer can document, such as a written statement of residency from the seller, which a lawyer can write into the agreement. A buyer who never asked has nothing to point to if the CRA later disagrees.

How it fits the other CRA steps

The CRA’s guidance on selling a business covers the seller closing payroll and GST/HST accounts, and says a seller and purchaser who meet the conditions can jointly elect, using form GST44, for no GST/HST to be payable on the sale of a business. That guidance does not address a non-resident seller’s income tax, so section 116 is a separate check rather than something those filings cover.