Central Closing Documents Necessary to Transfer a Business: Section 116
People are often surprised by the volume of closing documents that are prepared by a lawyer in order to transfer a business. There are a number of documents that are necessary to effectuate the smooth transition of the business’s ownership that ensure that there are no legal ramifications after the sale should a buyer become unhappy with some aspect of the business that he purchased.
When all the agreements, due diligence, and financing are over with and you’ve complied with provincial laws, the last step is closing the deal and transferring ownership of the business to the buyer. This will involve signing a plethora of closing documents, which grant the buyer ownership of various aspects of the business.
This article will review Section 116 of the Income Tax Act Statutory Declaration, which addresses the tax obligations of vendors who are non-residents of Canada. Once signed, the CRA will provide the Vendor with a clearance certificate for the sale of his business.
Whether you are selling the assets or the shares of your business, a Vendor is required to sign a statutory declaration attesting that he or she is a Canadian resident for income tax purposes. The same statutory declaration is signed when one sells a house or any real property in Canada. The general rule is that a s.116 declaration is signed by whenever a non-resident disposes of taxable Canadian property.
This declaration is sworn before a commissioner-of-oaths, notary public or lawyer. The crux of the declaration states that the selling person is a Canadian resident under the Income Tax Act. If the selling person is not a resident of Canada for tax purposes, then the purchaser is required to hold back a percentage of the purchase price and remit it to the CRA. The amount that must be withheld is 25 percent. The amount is then remitted to the CRA on account of non-resident withholding tax.
The Vendor can then apply to the CRA for a clearance certificate which is provided where the Vendor is not indebted to the CRA for any other taxes owed. Upon obtaining such clearance certificate, the withholding amount is released to the Vendor.
If the Vendor however is indebted to the CRA for back taxes, he or she will not be granted a clearance certificate. The taxes are withheld by the CRA and applied towards the back-taxes owed by the Vendor.
If the purchaser is not vigilant in obtaining the s.116 declaration on closing and it turns out that the Vendor is indeed a non-resident of Canada, the purchaser may become personally responsible to pay that portion of taxes to the CRA.
For this reason, it is imperative that the purchaser’s lawyer require that the Vendor swear a s.116 declaration attesting as to its residency of Canada.
In sum, Section 116 of the Income Tax Act applies whenever a non-resident sells taxable Canadian property. There is a liability on the purchaser to withhold and remit 25% of the purchase price as withholding taxes unless:
- After reasonable inquiry, there is no reason to believe that the seller is a non-resident;
- The non-resident seller is covered by a tax treaty between Canada and their country of residence;
- The Minister of National Revenue has issued a clearance certificate
If none of the above has occurred, the Purchaser must withhold and remit 25 percent of the purchase price to the CRA within 30 days of the closing date. Thus, a good lawyer acting for the purchaser of a transaction would regard a section 116 statutory declaration as an imperative closing document upon the sale of a business as it relieves the purchaser from personal liability in respect of withholding taxes.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law, 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.