A Dutch holding company that owns a building in Toronto or land in British Columbia discovers, on the day it agrees to sell, that Canadian tax on the transaction is not primarily its own problem. It is the buyer’s. Section 116 of the Income Tax Act makes the purchaser personally liable for a percentage of what it paid unless a certificate has been issued, and no Canadian purchaser’s counsel will release funds while that liability is open.
The consequence is procedural rather than substantive. The tax eventually payable on the gain may be modest, or nil. The cash held back until the Canada Revenue Agency has issued its certificate is neither, because it is computed on gross proceeds rather than on the gain. Vendors who plan the tax and neglect the procedure find a quarter of the price, and on some assets half of it, held back after completion.
Why the buyer carries the risk
Subsection 116(5) makes a purchaser who acquires taxable Canadian property from a non-resident, other than depreciable property and other than excluded property, liable for 25 per cent of the amount by which the cost of the property exceeds the certificate limit, and requires that amount to be remitted to the Receiver General within 30 days after the end of the month in which the purchaser acquired the property. The liability is the purchaser’s own, imposed as tax on behalf of the non-resident, and the same subsection gives the purchaser the right to deduct or withhold the amount from anything it pays or credits to the vendor, or otherwise to recover it.
The subsection sets out the ways out of that liability, and there are three. A certificate under subsection 116(4) may have been issued to the purchaser. The treaty route in subsection 116(5.01) may apply. Or the purchaser may, after reasonable inquiry, have had no reason to believe that the vendor was not resident in Canada. Against a vendor whose name and registered office are plainly Dutch, the last of those is unavailable. The holdback is therefore negotiated in the purchase agreement rather than argued about afterwards.
That negotiation is the vendor’s real leverage, and it happens before signature. Whether the withheld amount sits in escrow or with the purchaser, who receives the interest, and whether release on production of the certificate is an obligation rather than a discretion, are all commercial terms. Once the contract is signed on standard wording, the vendor is a creditor of the process.
What counts as taxable Canadian property
Real or immovable property situated in Canada is taxable Canadian property directly, as is an interest in it or an option on it. A direct sale of the building therefore engages section 116 without further analysis.
The definition in subsection 248(1) reaches further. Its paragraph (d) captures a share of the capital stock of a corporation, other than a mutual fund corporation, that is not listed on a designated stock exchange, and an interest in a partnership or in a trust other than a unit of a mutual fund trust or an income interest in a trust resident in Canada, where at any particular time in the 60 month period ending at that time more than 50 per cent of the fair market value of the share or interest was derived directly or indirectly from real or immovable property situated in Canada, Canadian resource properties, timber resource properties, options or interests in any of those, or a combination of them. Listed shares, shares of a mutual fund corporation and mutual fund units are not outside the definition either, but they come in under paragraph (e), which adds a condition of its own: in the same 60 month window the taxpayer, together with persons not dealing at arm’s length with it and partnerships in which they hold an interest, must have owned 25 per cent or more of the issued shares of a class or of the issued units.
Three features of the test surprise European sellers. The look back is 60 months, so a corporation that disposed of its Canadian building last year can still be taxable Canadian property when its shares are sold this year. The derivation counts indirectly as well as directly, although the chain is not unlimited, because paragraph (d) leaves out value derived through a corporation, partnership or trust whose own shares or interests were not themselves taxable Canadian property at the particular time. And the corporation whose shares are sold need not be Canadian. Paragraph (d) speaks of a share of the capital stock of a corporation without qualifying it by residence or place of incorporation, so the shares of a Dutch holding company can themselves be taxable Canadian property where the value test is met.
The ten day notification and its penalty
Subsection 116(3) requires the non-resident vendor to send the Minister a notice, by registered mail, not later than 10 days after the disposition. It reaches taxable Canadian property other than excluded property and other than the property described in subsection 116(5.2), and it falls away entirely where the vendor has already given a pre-disposition notice under subsection 116(1) naming the same purchaser, stating estimated proceeds at least equal to the actual proceeds and an adjusted cost base no higher than the actual one. The deadline runs from the disposition, not from the release of funds or the settlement of adjustments, and the ten days are calendar days. Missing it triggers the penalty in subsection 162(7), which is the greater of CAD 100 and CAD 25 for each day the failure continues, up to 100 days, so a ceiling of CAD 2,500. The Canada Revenue Agency states the same period and the same penalty in its circular on section 116.
The penalty is small enough that some vendors treat it as a rounding error, which misreads what the deadline is for. Filing after the fact means the certificate process starts after completion, with the purchaser already holding the money.
Subsection 116(1) is the other route. It lets the vendor send the Minister, at any time before the disposition, a notice of a proposed disposition setting out the proposed purchaser, a description of the property, the estimated proceeds and the adjusted cost base at the time the notice is sent. Filing early puts the certificate into the process before the agreement is signed and turns the holdback discussion from a demand into a mechanic. Where the timetable permits, it is the decision that determines how much of the price is available on completion.
Paying to release the price
The certificate is issued under subsection 116(2) for a proposed disposition, and under subsection 116(4) once the disposition has occurred, on payment to the Receiver General of 25 per cent of the amount by which the estimated proceeds, or the proceeds, exceed the adjusted cost base of the property. Security acceptable to the Minister may be furnished instead of payment. On a proposed disposition the certificate fixes a certificate limit equal to the estimated proceeds set out in the notice, and subsection 116(5) then measures the purchaser’s exposure by the excess of its cost over that limit.
The arithmetic is the reason the exercise is worth doing. The vendor pays a quarter of the gain, while the purchaser without a certificate must remit a quarter of the whole price. Where the gain is a small part of the price, the two figures sit far apart, and the distance between them is the money that does not arrive on completion.
The payment is on account and not a final tax, and both subsections say so, describing it as paid on account of tax under Part I payable by the non-resident for the year. The vendor still files a Canadian return for the year of disposition and recovers any excess through that return, not from the certificate process. The gap between payment and refund is a working capital item. Its length is not fixed anywhere in the guidance, which commits only to issuing the certificate at the earliest possible date once the necessary information and supporting documentation have been received and validated and acceptable payment or security has been received, so the timetable has to be built into the transaction with room to move.
The fifty per cent cases
Not every property attracts 25 per cent. Subsection 116(5.2) describes a separate class and subsection 116(5.3) applies 50 per cent to it. The class covers a life insurance policy in Canada, a Canadian resource property, real property or an immovable situated in Canada that is not capital property of the vendor, a timber resource property, depreciable property that is taxable Canadian property, and any interest, right or option in respect of a property to which the subsection applies, in each case other than excluded property. The certificate for that class does not follow the formula of a quarter of the gain at all. Subsection 116(5.2) issues it on payment of such amount as is acceptable to the Minister, or on acceptable security, and fixes an amount equal to the proceeds, the proposed proceeds or such other amount as is reasonable in the circumstances. A purchaser who takes the property without that certificate is liable under subsection 116(5.3) for 50 per cent of the excess of the amount payable for the property over the amount fixed in the certificate, remittable within 30 days after the end of the month of acquisition. The Canada Revenue Agency puts this class on Form T2062A and the rest on Form T2062.
Two of those items matter to a European property holding. The first is real property held as inventory, which is the position of a developer and sometimes of a holding that has bought and sold often enough to be carrying on a trade. The second is depreciable property, the position of any building on which capital cost allowance has been claimed. The higher percentage reflects that recapture is taxed in full rather than as a capital gain.
A single asset can fall into both regimes at once. Land is commonly capital property while the building on it is depreciable property, and the circular has the gain on the land and building computed on Form T2062 and the recapture on Form T2062A, which is two computations on two forms for what the parties regard as one sale. The allocation of the price between land and building is therefore a term of the contract, not an accounting exercise afterwards.
What the treaty does and does not reach
Subsection 116(6) defines excluded property for the purposes of section 116, and its paragraph (i) puts treaty-exempt property inside that definition, which takes such property outside subsections 116(1), (3), (5) and (5.2). Subsection 116(6.1) makes a property treaty-exempt where it is treaty-protected property of the vendor and, where the purchaser and the vendor are related, the purchaser gives notice under subsection 116(5.02). Subsection 116(5.01) lets a purchaser who concludes after reasonable inquiry that the vendor is resident in a treaty country, and that the property would then be treaty-protected, rely on that conclusion, again on giving notice. The notice must reach the Minister on or before the day that is 30 days after the date of the acquisition, and the Canada Revenue Agency provides Form T2062C for it.
Whether the relief is available turns on the convention itself. The convention between Canada and the Kingdom of the Netherlands, signed on 27 May 1986 and amended by the protocols of 1993 and 1997, has been in force in its present form since 15 January 1999. Article 13(1) lets Canada tax gains that a Dutch resident derives from the alienation of immovable property situated in Canada. A Dutch holding selling the Canadian building itself therefore has no treaty answer to the Canadian charge.
The share case is different, and the difference is easy to miss. Article 13(4)(a) covers shares only where all of four conditions hold: they are shares of a company that is a resident of the other State, they are not listed on an approved stock exchange in one of the States, they form part of a substantial interest, and their value is derived principally from immovable property situated in that other State. A substantial interest exists where the resident and persons related to it own 10 per cent or more of the shares of any class of the capital stock. Immovable property for this purpose takes in the shares of a company whose value is itself principally so derived, but leaves out property, other than rental property, in which the business of the company is carried on. Article 13(4)(b) does the same work for a substantial interest in a partnership, trust or estate established under the law of the other State, and for a controlling interest of 50 per cent or more in one that was not, where the value in either case is derived principally from immovable property situated in that other State. Article 13(7) leaves gains on anything outside paragraphs 1 to 4 taxable only in the State of which the alienator is a resident.
The consequence is that domestic law and the convention part company on the facts this article began with. The shares of a Dutch company whose value comes from Canadian real property are taxable Canadian property under paragraph (d) of the domestic definition, but they are not shares of a company resident in Canada, so article 13(4)(a) does not reach them and, for a vendor resident in the Netherlands, article 13(7) leaves the gain to the Netherlands, subject to the principal purpose test that the Multilateral Instrument adds to the convention and that the next paragraph describes. Where the company whose shares are sold is Canadian and the substantial interest and value tests are met, Canada keeps the gain and the certificate procedure runs in full.
The bilateral text is not the whole rule, and a consolidated version published by either government does not say so. The convention is a covered tax agreement under the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which entered into force for the Netherlands on 1 July 2019 and for Canada on 1 December 2019. Both states notified article 13(4) as a provision described in article 9(1) of that convention, so the value threshold is now met if it is satisfied at any time during the 365 days preceding the alienation, a testing period the bilateral text does not contain. Article 9(4), which would have replaced article 13(4) with a rule catching shares and comparable interests in any entity, does not apply here, because article 9(8) gives it effect only where every contracting jurisdiction has chosen it, Canada chose it and the Netherlands did not. Canada also reserved the extension in article 9(1)(b) for agreements that already cover interests other than shares, and listed article 13(4)(b) of this convention among them. The same instrument carries article 7(1), the principal purpose test, which neither state reserved and which Canada accepted as an interim measure: a benefit under the convention is not granted in respect of an item of income where it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining it was one of the principal purposes of an arrangement or transaction that resulted directly or indirectly in it, unless granting it would accord with the object and purpose of the relevant provisions. The convention carries no such test of its own, so this one reaches it through the instrument, and it bears on every treaty benefit described above, the relief from the Canadian charge on a share sale included.
Where the treaty route does apply, it removes the certificate requirement rather than the paperwork. Someone still gives notice within 30 days, and the purchaser still needs a reasoned basis for its conclusion.
The years before the sale determine the tax on it
The exit arithmetic is largely set by how the property was held while it produced income. Rents paid to a non-resident are subject to Part XIII tax at 25 per cent of the gross amount under paragraph 212(1)(d). A non-resident may instead elect under section 216 to file a return under Part I and be taxed as though resident on the income from its Canadian real property alone, within two years after the end of the taxation year, or within six months where an undertaking described in subsection 216(4) has been filed for that year. The undertaking also lets the payer remit 25 per cent of the amount available out of the rent rather than of the gross rent.
A holding that never elected has paid tax on gross rent and claimed no capital cost allowance. A holding that elected has claimed allowances that reduce the undepreciated capital cost and produce recapture on sale. Neither is wrong, and which position the group is in is settled years before the sale itself.
The choice of vehicle sits alongside it. A non-resident corporation carrying on business in Canada directly pays the additional tax in subsection 219(1), which is 25 per cent of its taxable income earned in Canada, adjusted as that subsection directs, after the Canadian income taxes on that income and after the allowance for investment in property in Canada. Article 10(7) of the convention caps the additional tax at the rate in article 10(2)(a), which is 5 per cent, and defines the earnings it bites on after deducting the business losses attributable to those establishments, the taxes chargeable in that State, the profits reinvested there, and five hundred thousand Canadian dollars reduced by what the company or a related person has already deducted under that provision. A Canadian subsidiary avoids branch tax and introduces a dividend instead. That comparison is made at establishment, and it shows up in the completion statement years later.
Sequencing a disposal from Europe
The order of work is fixed by the statute. Establish first whether the asset is taxable Canadian property and which subsection governs it, because the answer sets both the percentage and the form. Compute the adjusted cost base and, where the property is depreciable, the undepreciated capital cost, from records that may be held in Europe. Then file, and the filing differs by class: a notice of proposed disposition under subsection 116(1) where the property is ordinary capital property, or an application under subsection 116(5.2) where it is depreciable property, inventory real property, or resource or timber property, since subsections 116(1) and 116(3) do not reach that class at all. On a depreciated building that means Form T2062A for the recapture alongside Form T2062 for the gain, as the circular directs.
Only then is the holdback negotiated. A vendor who can show the purchaser a filed application and an expected certificate is negotiating about mechanics. A vendor who cannot is negotiating about whether the purchaser trusts it, which is a different conversation and a worse one. Where the contract is silent on what happens if the certificate arrives late, the silence resolves in the purchaser’s favor.
After completion, the notice under subsection 116(3) follows if the pre-disposition route was not used and the property is not in the subsection 116(5.2) class, and then the return for the year of disposition, which reconciles the certificate payment against the actual liability. The tax on a Canadian property sale from Europe is rarely the difficult part. The sequence in which the paperwork is done decides how much of the price the vendor sees on the day.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.