Drafting Drag along Triggers in International Shareholders Agreements
Drafting cross-border drag-along triggers requires verifiable voting thresholds, explicit cash valuation floors, and deeded power-of-attorney execution clamp mechanics.
Section 116 Clearance
Meaning
Tax certificate issued by the Canada Revenue Agency to verify that a non-resident vendor has satisfied tax obligations arising from the sale of taxable Canadian property. Obtaining a section 116 clearance allows the purchaser to pay the full purchase price without withholding a portion of the proceeds.
Withholding Compliance
The purchaser is legally required to withhold twenty five percent of the gross purchase price if the vendor does not provide the certificate at closing. These funds are held in trust until the tax authority confirms that the vendor has paid the necessary capital gains tax on the transaction.
Certificate Issuance
The vendor submits an application detailing the cost base of the asset and the expected proceeds to the tax department. Officials review the documentation to calculate the tax due and issue the certificate once payment or security is received. This process often takes several months to complete and requires precise record keeping from the date the asset was first acquired.
The certificate specifies the limit of the proceeds that are covered by the tax payment or the security provided by the vendor.
Asset Transfer
The clearance provides the buyer with protection against liability for the unpaid taxes of the vendor under the Income Tax Act. Without this document, the buyer remains personally liable for the tax amount even after the transaction has closed.