Buying a Morrisburg business when the seller could not answer a residency question

The situation

‘If our seller turns out to live outside Canada for tax purposes, are we the ones on the hook?’ Joost asked that question in our first meeting, almost as an afterthought, after a colleague had mentioned something about non-resident sellers over dinner. It was not an afterthought. It turned out to be the single most important question anyone asked in the entire transaction, and answering it properly is what protected his family from a bill that could have run into six figures.

Joost, an architect, and his wife Thalia, a hospital department manager, had agreed with Thalia's brother Nikos to buy a well-established service business in Morrisburg, in the two-to-five million dollar range, with all three planning to work in it together going forward. The seller was an older man who had built the business over three decades and was retiring. Nothing about the deal looked unusual at the outset: a straightforward share purchase, a clean set of financials, a seller who wanted to close quickly and move on.

Under the Income Tax Act, when a non-resident sells certain kinds of Canadian property, most commonly shares of a Canadian company or property whose value comes mainly from Canadian real estate, the buyer can become personally liable to withhold a portion of the purchase price and remit it to the government, unless the seller obtains a clearance certificate confirming their tax obligations are addressed, or the buyer withholds the required amount itself. The rule is not triggered by every sale involving a non-resident, so the first step is always confirming both the seller's residency and whether what is being sold falls within its scope; here, a straightforward share sale, it did. It is a rule most buyers never think about, because most sellers are ordinary Canadian residents. It exists precisely for situations like this one, where a seller has moved abroad and Canada has no other reliable way to collect tax on the gain from the sale.

When we asked Joost's question directly to the seller's representative, the answer was slower coming than it should have been. The seller, it turned out, had spent the better part of the last four years living outside Canada, splitting time between two other countries while nominally still listing a Canadian address on his business records. Whether he was a non-resident for tax purposes was a real question, not a formality, and it had not occurred to anyone on the seller's side to raise it before Joost did.

The legal question

The core issue was who bore the risk if the seller turned out to be a non-resident and no clearance certificate was in hand at closing. Left unaddressed, the rule places that risk on the buyer: if a buyer pays full price to a non-resident seller without withholding, and it later turns out the seller owed tax on the sale, the government can pursue the buyer for the unremitted amount. That exposure is not without limit, a buyer who made reasonable inquiries and had no reason to believe the seller was a non-resident is protected, but by the time this question came up, the family already had reason to wonder about the seller's residency, which meant they could not simply assume that protection applied without asking the question directly.

The seller's lawyer initially took an aggressive position: that residency was a personal tax matter for the seller alone, that the family should simply trust the seller's representation that everything was in order, and that inserting withholding language into the agreement would insult a man who had run an honest business for thirty years. It was a reasonable-sounding argument aimed at getting the family to waive protection they were legally entitled to.

What turned the file was something the seller's side had already done, before we were retained. Weeks earlier, in an unrelated conversation about the sale timeline, the seller's accountant had written to Nikos suggesting the closing be pushed later in the year so the seller could ‘sort out the certificate situation’ first. It was a passing line in an email about scheduling, but it was also, in plain language, an acknowledgment from the seller's own side that a clearance certificate was a live issue requiring resolution. Once we had that email, the seller's later position that residency was not a real concern became very hard for his lawyer to defend.

We used that email as the anchor for a formal request: either the seller obtain and deliver a clearance certificate before closing, confirming the government's tax interest in the sale proceeds was addressed, or the family would exercise its right to withhold and remit a percentage of the price directly, holding the rest in trust until the certificate arrived. The seller's lawyer's own earlier scheduling email had already conceded the certificate was necessary, which meant there was no credible way left to argue it was optional.

What we did

1. Confirmed the seller's residency status through the questions the accountant's email had already opened, asking directly how much time the seller had spent in Canada over the prior years and where his ordinary residence was. The answers, once given plainly, put him squarely in non-resident territory rather than the ambiguous middle ground his lawyer had first suggested.
2. Preserved the seller's own scheduling email as a formal exhibit to the negotiation, rather than raising the residency issue as if it were the family's new demand. Framing it as the seller's own acknowledged concern, not ours, took away the room for his side to characterize the request as adversarial or unusual.
3. Explained the withholding mechanism to Joost, Thalia and Nikos in plain terms before proposing it to the seller, so the family understood it was not a penalty on the seller but a legal protection for themselves, and could weigh it against simply delaying closing until a certificate was in hand.
4. Proposed two paths in writing to the seller's lawyer: obtain the clearance certificate before closing, or accept a holdback of the required withholding percentage from the purchase price, released once the certificate arrived. Giving the seller a genuine choice, rather than a single ultimatum, moved the conversation faster.
5. Structured the holdback amount conservatively, calculated against the maximum percentage the rule could require, so the family's exposure was fully covered even if the certificate took longer than expected to arrive, and so nobody had to renegotiate the number later under time pressure.
6. Built a release mechanism into the closing documents specifying exactly what document from the government would trigger release of the holdback funds to the seller, removing any ambiguity about when the money would move once the certificate was issued.
7. Coordinated timing with the seller's accountant directly in the final two weeks, once the seller accepted the certificate route, to keep the application moving and avoid an extended holdback period that would have tied up funds on both sides longer than necessary.

The outcome

The seller elected to pursue the clearance certificate rather than accept an open-ended holdback, and it was issued a little over two months after the application went in, ahead of the buyers' internal target date. The purchase price did not move. The deal structure the family had proposed, protective of their own position without punishing the seller, turned out to be the version everyone could live with once the aggressive opening position from the seller's lawyer fell away.

The family's exposure to a personal withholding liability, which could have run into six figures had the certificate never materialized and the deal closed without protection, never came due. That is the nature of prevention-style outcomes in this kind of file: nothing dramatic happened, because the mechanism that would have created a problem was addressed before it had the chance to.

Joost still brings up the dinner conversation that prompted his original question, and the fact that a single well-placed question at the first meeting shaped the entire negotiation. Nikos, who received the seller's scheduling email months before any lawyer was involved, did not think much of it at the time. It became the single most useful piece of paper in the file.

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