Selling Canadian Company Shares as a Non-Resident: Section 116

Do non-residents pay capital gains tax on shares of a Canadian private company?

Only when the shares are taxable Canadian property. A non-resident is taxed in Canada on gains from taxable Canadian property, other than property a tax treaty protects (Income Tax Act, s. 115(1)(b)). An unlisted share is taxable Canadian property if, at any time in the 60 months before the sale, more than 50% of its value came directly or indirectly from Canadian real property, Canadian resource property or timber resource property (s. 248(1)).

What makes a case not simple: a company that owned real estate at any point in the past five years, shares received in a reorganization or rollover in the past five years in exchange for taxable Canadian property (deemed taxable Canadian property for 60 months, s. 85(1)(i); Canada taxes their gain, but they are outside section 116, so no notice or holdback, s. 116(6)(a)), a departure return or Form T1161 filed late or not at all, a deferred departure tax that falls due when you sell, a buyer related to you, an asset sale that leaves the cash inside the company, or an offer that arrives close to your departure date.

Gather before you sign:

• Your departure-year return and the value you reported for the shares (Form T1161, and Form T1244 if you deferred the tax).
• The company's balance sheets for the past 60 months, with the value of any Canadian real estate or resource property.
• Your share cost, the shares' paid-up capital, and who the buyer is and whether you are related.
• Your new country's tax treaty with Canada.
• Proof of the date you became a non-resident (move date, new home, when your ties ended).
• The draft purchase agreement: price, closing date, form of payment and any holdback clause.

What did departure tax already do to my shares?

When you left, you were deemed to sell most of your property at fair market value, and that value became your new cost (s. 128.1(4)). Your company shares were part of that deemed sale even if the company owns Canadian real estate. Only certain property is left out, such as Canadian real estate in your own name, property of a business you carry on through a permanent establishment in Canada, and registered plans like an RRSP (s. 128.1(4)(b)). If you were resident in Canada for 60 months or less in the 10 years before leaving, shares you owned when you arrived, or inherited after, are also left out: see leaving within five years of arriving. So Canada already taxed the gain up to your leaving date. If the shares are not taxable Canadian property when you sell, Canada does not tax the gain since departure.

If the shares are taxable Canadian property when you sell, Canada taxes the gain above your departure value, unless a treaty protects it.

If you elected on Form T1244 to defer the departure tax, the CRA requires security when the federal tax deferred is more than $16,500 ($13,777.50 for former Quebec residents). Selling the shares can make some or all of the deferred tax payable; the CRA says the amount owing is due by April 30 of the year after the sale (CRA: Dispositions of property).

How the departure value is calculated belongs to departure tax on private-company shares. If the shares are taxable Canadian property when sold and are worth less than at departure, you can elect in your return for the sale year to reduce the departure gain by that loss (s. 128.1(8)); see shares that fell after you left Canada.

Section 116 certificate: will the buyer hold back part of the price?

A buyer can hold back part of the price only when the shares are taxable Canadian property. The non-resident seller gets a section 116 certificate by paying tax or posting security; without a certificate, the buyer is liable for tax on the seller's behalf (s. 116).

The certificate payment is a prepayment, not the final tax. The final tax is worked out on your non-resident return, and any excess comes back after that return is assessed: see getting a holdback back. The form-by-form detail for real estate is in non-residents selling Canadian property.

What does the tax treaty with my new country say?

A treaty can only reduce Canada's tax, never add to it. If your shares are not taxable Canadian property, Canada does not tax the later gain whatever the treaty says (s. 115(1)(b)), so this section matters only for property-rich shares. Many of Canada's treaties let Canada keep taxing gains on shares that draw most of their value from Canadian real estate, but the wording differs by country. A gain a treaty exempts from Canadian tax makes the shares treaty-protected property (s. 248(1)), and Canada does not tax that gain (s. 115(1)(b)).

The Canada–Korea treaty shows how the clauses can stack (Finance Canada):

• Article 13(4): shares deriving more than 50% of their value from Canadian immovable property may be taxed in Canada.
• Article 13(5): shares forming a substantial interest, 25% of the company's issued shares held alone or with associated or related persons, may be taxed where the company is resident.
• Article 13(7): a country may tax a former resident's gain if the person was resident there at any time in the five years before the sale.

These clauses only decide whether shares that are already taxable Canadian property stay taxable in Canada or become treaty-protected.

Read your own treaty's capital gains article. Even with treaty-protected shares, a related buyer must send the CRA Form T2062C within 30 days after the purchase, or section 116 still applies; the CRA does not accept a late notice (s. 116(5.02) and (6.1); IC72-17R6, paragraphs 27 and 28). Tax in your new country is outside this page.

Can I still use the lifetime capital gains exemption after leaving?

At most for gains in the year you leave, and only if the shares qualify. The exemption on qualified small business corporation shares requires you to be resident in Canada throughout the year (s. 110.6(2.1)). A person resident at any time in the year and throughout the year before is deemed resident throughout that year for the exemption (s. 110.6(5)). That is how the deemed sale at departure can use the exemption, up to $1.275 million of lifetime gains.

In any later year you are non-resident throughout, and the exemption is not available. A real sale after your departure date rarely uses the exemption, even in the same calendar year. A qualifying share must be a share of a Canadian-controlled private corporation at the time of sale, and a company controlled by a non-resident is not one (s. 125(7); s. 110.6(1)). If you controlled the company and have left, that test usually fails. Get it checked before you sign. Planning the exemption is in using the capital gains exemption before leaving Canada, and the share tests in selling your business.

Sell before I leave, in the year I leave, or after?

The sale date decides which rules apply. Compare:

An offer that arrives near your departure date is the hardest case: the sale price can become evidence of the departure value, and moving the closing date can change which return reports the gain. For shares that are not taxable Canadian property, Canada's tax is set by the departure value whether you sell soon after leaving or years later; the date mainly changes your new country's tax, which this page does not cover. Compare both countries before choosing a closing date.

Share sale or asset sale once I'm non-resident?

In an asset sale, the corporation sells and is taxed on its own gains; you are not the seller. Getting the cash out to you abroad is then generally a dividend, and Canada withholds Part XIII tax (the tax withheld on payments to non-residents) of 25% unless a treaty lowers the rate. A share sale is your own sale, taxed as above.

Whether the corporation stays resident in Canada after you move is covered in non-resident owners of a Canadian corporation. Winding up after an asset sale is in close or keep your corporation.

Selling to a related Canadian company: why can part of the price become a dividend?

Section 212.1 can turn most of the price into a dividend. It applies when a non-resident sells shares of a Canadian corporation to another Canadian corporation the seller does not deal with at arm's length (for example, one the seller or a relative controls), and the two corporations are connected right after the sale. Non-share consideration above the shares' paid-up capital (the capital paid in for the shares as tracked for tax, often a nominal amount for a founder) is deemed a dividend (s. 212.1(1.1)), which is subject to Part XIII withholding, not capital gains treatment.

A Canadian corporation controlled by a family member, such as a sibling's holding company, is not at arm's length with you and can bring the sale within section 212.1. Check this before agreeing on the price or the form of payment.

What do I file in Canada for the year of the sale?

If the shares are taxable Canadian property, you generally file a non-resident return for the year of the sale, by April 30 of the following year, and report the gain. You can skip it only if no Canadian tax is payable for the year, you owe nothing for earlier years (deferred departure tax secured with the CRA does not count), and every taxable Canadian property you sold was excluded property or covered by a section 116 certificate (s. 150(1.1)(b)(iii) and (5)). A taxable gain usually means you file: see non-resident returns and catch-up. The section 116 notice comes on top of the return, not instead of it.

If the shares are not taxable Canadian property, Canada does not tax the later gain and no section 116 notice is needed. If you deferred departure tax on Form T1244, the CRA asks you to report the sale by sending its Non-Resident T1 Adjustments unit (Winnipeg Tax Centre) a list of the property as described on Form T1243, the number of shares and the date, and to pay any deferred tax that comes due by April 30 of the following year (CRA: Dispositions of property).

Example

These figures are in Canadian dollars and are illustrative only.

Software company, unrelated buyer

• Departure year: An owner leaves in June. The shares cost almost nothing and are worth C$1,000,000. The company owns no real estate, so the shares are not taxable Canadian property. The departure return reports a C$1,000,000 deemed gain; the owner defers the tax on Form T1244 and posts security.
• Two years later: The owner sells to an unrelated buyer for C$1,300,000. The C$300,000 gain since departure is not taxed by Canada. No section 116 notice is needed. The departure tax deferred on these shares is now payable, by April 30 of the year after the sale, and the sale is reported to the CRA's Non-Resident T1 Adjustments unit.

Company that owns a warehouse

• A company's Calgary warehouse is 70% of its value, so the shares are taxable Canadian property. At departure they were worth C$1,500,000; the departure return taxed that gain, and C$1,500,000 became the new cost.
• Two years later: price C$2,000,000, gain since departure C$500,000. For a certificate, the owner pays or secures C$125,000 (25% of the gain). Without a certificate, the buyer can hold back C$500,000 (25% of the price).
• The owner files a non-resident return reporting the gain; the C$125,000 is credited against the final tax.

Brother's holding company buys the shares

• An owner sells shares to a Canadian holding company owned by a brother for C$500,000 cash. The shares' paid-up capital is C$100.
• If section 212.1 applies, about C$499,900 is deemed a dividend, subject to Part XIII withholding, instead of a capital gain.

Different for you?

• The company owns or owned Canadian real estate or resources in the past five years: the shares are taxable Canadian property; plan the section 116 certificate and return with corporate tax help.
• The buyer is related to you, or is a Canadian company your family controls: section 212.1 can change the result; get it reviewed through corporate tax help.
• An offer arrives near your departure date, or your new country may tax the same gain: the closing date can move the gain between returns and countries; see corporate tax help.
• The buyer wants the company's assets, not your shares: the corporation pays tax on the sale and the cash reaches you as a dividend with withholding; plan both with corporate tax help.
• You never filed your departure return or Form T1161, or filed late: late departure forms and penalties; catching up before a sale is work for corporate tax help.
• The CRA questions the value you used at departure: when the CRA disputes your departure value.
• You deferred departure tax and posted security: deferring departure tax.
• The buyer already held back part of the price: getting a holdback back.
• You have not left yet and want to use the exemption: using the capital gains exemption before leaving Canada.
• The company is a venture-backed startup: the exemption on a startup exit.
• You are moving to the US with the company: moving across the border with a company.
• You are still resident and selling: selling your business.