Buying a BC Business From a Non-Resident Seller: Section 116

You have found a business in British Columbia and the owner lives outside Canada. Alongside price and closing date, a question comes up that many buyers have never faced: are you the one who has to hold back tax from what you pay the seller?

The rule sits in section 116 of the federal Income Tax Act. It can leave a buyer personally responsible for the seller's tax, so it shapes what the purchase agreement needs to say. This article explains the rule in plain terms. A lawyer or accountant can confirm how it applies to your deal.

This article covers the law of British Columbia.

What the section 116(5) rule says

When you acquire taxable Canadian property from a non-resident of Canada, section 116(5) of the Income Tax Act requires you to send the Receiver General 25% of the amount by which the cost exceeds the certificate limit. The payment is due within 30 days after the end of the month in which you acquired the property.

The certificate limit is the amount stated on a certificate. If there is no certificate, the limit is zero, so the 25% applies to the whole cost. For example, if you acquire qualifying property in July with no certificate, the 25% is calculated on the full price, and the remittance is due 30 days after the end of July.

Whether a particular asset is taxable Canadian property is a technical question that depends on the facts. Ask your lawyer or accountant to confirm it early, before you settle the price and terms.

How a buyer avoids liability

The rule has exceptions. You are not liable under section 116(5) in any of these three situations:

• After reasonable inquiry, you had no reason to believe the seller was not resident in Canada.
• A treaty-protected property rule applies under section 116(5.01).
• The Minister issued a section 116(4) certificate.

The first exception depends on what you actually asked and what you learned. A buyer who simply assumes the seller lives in Canada is in a weaker position than one who made and recorded sensible inquiries. The third exception is the most concrete, because a certificate is a document you can obtain and keep on file.

Turning the rule into terms of the agreement

Each exception points to a practical term you can ask for in the purchase agreement. Your lawyer will draft the exact wording, but the usual building blocks are these:

Without a certificate the limit is zero, so the withholding applies to the whole cost. That is a large amount to hold back, which is why buyers and sellers usually raise the certificate early in the process.

Share purchases and asset purchases

How you buy matters. In a share purchase, a change in share ownership does not change the tax values of the corporation's assets, and share purchases are generally not subject to GST/HST. You also take the company with its history and liabilities.

In an asset purchase, you allocate the price to each asset at fair market value, with the remaining balance attributed to goodwill. The allocation should match what the vendor reports. How this applies to your deal depends on your situation, so it is worth confirming with a lawyer or accountant.

What to do next

• Ask the seller early where they live for tax purposes, and keep a written record of your inquiry.
• Ask your lawyer or accountant whether what you are buying is taxable Canadian property.
• Raise the section 116(4) certificate before you agree a closing date.
• Make sure the agreement includes a residence statement, a withholding clause and a certificate requirement.
• Diary the remittance deadline: 30 days after the end of the month of acquisition.
• Compare the tax effects of a share purchase and an asset purchase before you commit.

Because the buyer can be answerable for the seller's tax, get advice before you sign, not after closing.

Frequently asked questions