A merger held up by one shareholder living abroad

The situation

The email from the purchaser's counsel arrived four days before closing: roughly two hundred thousand dollars of the deal proceeds would be held back at signing, pending confirmation of the correct non-resident withholding treatment for one shareholder's payout. Zeynep read it twice, then called Agnieszka, who read it a third time before either understood that the number they had built the closing timeline around was no longer the number anyone was going to receive on the day marked on the calendar for months.

Zeynep had spent a decade as a construction project manager before leaving the field to build scheduling software aimed at mid-sized contractors, frustrated by how much of the job involved chasing paper updates between trades. Agnieszka, a software developer by training, had built a competing product doing much of the same thing from the other side of Listowel, drawn into building it after years of watching the same inefficiencies from a different angle of the same industry. For two years the two companies had circled each other, underbidding on the same contracts and duplicating the same engineering work, before both founders concluded that combining the businesses served their clients and their own finances better than continuing to compete for the same customers.

The merger itself took the better part of a year to negotiate: valuing two private companies against each other, agreeing on governance of the combined entity, in a deal that valued the merged company at roughly thirty-eight million dollars, and working out how each existing shareholder's stake would convert into ownership of the new company. Most shareholders on both sides simply exchanged their old shares for shares in the merged entity, a rollover that avoided triggering an immediate tax bill for continuing owners.

One shareholder did not fit that pattern. Kerem, a software developer who had been an early technical partner in Agnieszka's company before relocating abroad years earlier and stepping back from any operational role, held a minority stake through a holding company incorporated in a country with a tax treaty with Canada. Because Kerem had no ongoing involvement in the business, the deal was structured to buy out his shares for cash rather than roll them into the merged entity, which turned his portion of an otherwise straightforward merger into an outright sale by a non-resident, with its own rules neither founder had dealt with before.

A sale of shares that count as taxable Canadian property by a non-resident shareholder triggers a withholding obligation on the purchaser under the Income Tax Act, generally requiring a portion of the proceeds to be remitted unless the seller has arranged relief in advance of closing. Not every private company's shares meet that threshold; it turns on how much of the company's value comes from Canadian real property, not simply where the company was incorporated. The combined company owned its Listowel building outright, and that real property was enough of its value that Kerem's shares cleared the threshold, so the withholding question was live rather than avoidable. Zeynep and Agnieszka knew, in general terms, that something needed to happen on Kerem's portion of the deal before it could close cleanly. What they believed had already happened, months into planning, was not what the purchaser's own counsel, reviewing the file with days left before signing, was prepared to accept without more.

The complication

Months earlier, before either founder had retained counsel for the transaction itself, Agnieszka had spent an evening researching the withholding question online, trying to work out whether Kerem's treaty-country residency would actually help him keep more of his payout. She found several articles describing reduced withholding rates under Canada's tax treaties, concluded the treaty rate applied automatically because Kerem's holding company was resident in a treaty jurisdiction, and told Kerem in good faith his proceeds would only be subject to the lower treaty rate rather than the full statutory withholding the Income Tax Act otherwise imposes.

That conclusion skipped two steps that turned out to matter a great deal in practice. First, the reduced treaty rate is not self-executing: a seller who wants a purchaser to withhold at a treaty-reduced rate instead of the full statutory rate generally needs to apply for a clearance certificate or a comparable waiver in advance of closing, giving the tax authority an opportunity to confirm the treaty actually applies to that specific transaction before any money changes hands. Second, the treaty benefit depends on Kerem's holding company being the true beneficial owner of the proceeds under the treaty's own definition, not merely a resident entity sitting somewhere convenient in the ownership chain, a distinction that turns on facts about the company's management and substance nobody had yet documented.

By the time we were retained to close the transaction, Agnieszka's earlier research had already hardened into the working assumption on both sides of Kerem's portion of the deal. Kerem had structured his own financial expectations, and some of his own personal arrangements in his country of residence, around receiving proceeds net of a reduced rate that had never actually been applied for through the proper channel. No clearance certificate application had been filed. No advance ruling or waiver existed anywhere in the file. The purchaser's own counsel, reviewing the closing file with only days left to go, correctly identified that without a filed certificate in hand, they were legally required to withhold at the full statutory rate, regardless of what anyone on the seller's side believed the treaty ultimately entitled Kerem to receive.

That gap, between what Kerem had been told to expect and what the purchaser's counsel was legally obligated to withhold absent proper documentation, was the actual complication, and it had nothing to do with whether the underlying treaty relief was real. It very likely was real. Nobody had yet done the procedural work that turns a genuine entitlement into something enforceable at closing.

What we did

1. Reviewed the treaty article Agnieszka's research had relied on and confirmed the underlying premise was directionally sound: Kerem's holding company, if it genuinely met the beneficial ownership and residency tests the treaty set out, likely did qualify for a meaningfully reduced withholding rate on the sale proceeds. The original research had correctly identified where the answer lived and badly misjudged how a seller actually gets there before a fixed closing deadline arrives.
2. Explained to Kerem and the founders why a treaty rate is not automatic, walking through the practical difference between a treaty entitlement existing in principle and a purchaser being legally permitted to withhold at that lower rate at closing, which requires the seller to have applied for and received a clearance certificate or comparable confirmation before funds actually change hands. Resetting this understanding early kept it from becoming an unproductive argument at the closing table itself.
3. Gathered the substance documentation for Kerem's holding company, including where it was actually managed day to day, who made its decisions, and how long it had held the shares in question, because a beneficial ownership determination turns heavily on these underlying facts, and a purchaser's counsel scrutinizing a late-filed request would reasonably want more than a bare assertion of treaty residency on a letterhead.
4. Filed an application for a reduced withholding certificate on an expedited basis, disclosing plainly to the tax authority that the transaction was closing on a fixed commercial schedule and that full statutory withholding would otherwise apply to a departing shareholder, since the standard processing time for this kind of request does not normally accommodate a closing only days away, and noted that a holdback was already built into the purchase agreement to bridge any gap.
5. Negotiated a holdback structure directly with the purchaser's counsel to serve as a bridge while the certificate request remained pending, so the broader transaction could still close on the schedule everyone had planned around rather than waiting indefinitely on a government response neither side could control or accelerate, with the disputed amount held in escrow instead of remitted outright at the full statutory rate.
6. Drafted the escrow and release terms to specify exactly how the held-back funds would be distributed depending on whether the certificate arrived before or after an agreed date, fully protecting the purchaser from any exposure to withholding liability while still giving Kerem a clearly defined path to the treaty-reduced amount rather than an open-ended, indefinite wait. The terms also addressed what would happen if the certificate was ultimately refused rather than merely delayed, so that scenario was not being negotiated for the first time under pressure months later.
7. Corrected Kerem's own expectations about timing directly, since the earlier online research had led him to plan his own affairs around receiving the reduced-rate amount in full at closing, and the honest position now was that a real portion of his proceeds would sit in escrow for a period measured in months while the certificate request worked its way through the standard government process.

The outcome

The transaction closed on schedule, with the escrow arrangement absorbing the gap between what full statutory withholding would have required and what Kerem believed, correctly as it turned out, he was ultimately entitled to receive under the treaty. The certificate request was still pending on the actual closing date, which meant Kerem did not receive his full expected proceeds on the day the rest of the merger completed, and the founders did not get to present the deal to him as the fully clean, resolved outcome they had spent a year working toward.

The certificate was granted several months later, confirming the reduced treaty rate applied to Kerem's holding company much as the substance documentation had supported all along. The escrowed funds were released according to the terms negotiated at closing, and the net amount Kerem eventually received matched what the original, mistaken online research had promised him from the start, just on a materially longer timeline and only after real documentation had replaced an untested assumption everyone had been relying on.

Nobody came out of it exactly where they had expected to be when negotiations began. The purchaser accepted a holdback it would rather not have needed to negotiate this close to signing. Kerem waited months for money he had been told, in good faith but incorrectly, would simply arrive at closing. Zeynep and Agnieszka closed their long-planned merger on time, but spent its final week managing a problem that careful advance planning, rather than an evening of online research, would have avoided.

The compromise held because it was built on real documentation, not on continued disagreement about who was right. Both sides could point to the escrow terms and know exactly what would happen once the government's answer eventually arrived, without relitigating the underlying entitlement in the meantime.

What you can learn from this