Meaning
Statutory procedure in Canada regulates the disposal of taxable Canadian property by non-resident vendors. Compliance with section 116 canadian income tax act ensures that the government collects taxes on capital gains before the proceeds leave the country. The buyer must withhold a portion of the purchase price unless the seller provides a clearance certificate.
This rule applies to real estate and certain shares in private corporations.
Withholding Obligation
Purchasers are legally required to deduct twenty five percent of the gross purchase price and remit it to the tax authorities. Failure to perform this duty makes the buyer personally liable for the vendor’s tax debt. This liability creates a powerful incentive for buyers to demand a certificate from the seller.
The obligation extends to all types of taxable Canadian property including resource property and timber resource property.
Clearance Certificate
Vendors should apply for the certificate as soon as an agreement is signed.
Vendor Relief
Obtaining the certificate allows the seller to receive the full purchase price without the statutory deduction. Final tax liability is eventually settled when the non-resident files a Canadian tax return at the end of the year. This system balances the need for tax security with the rights of the investor.
