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Central Closing Documents Necessary to Transfer a Business

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Central Closing Documents Necessary to Transfer a Business

People are often surprised by the volume of closing documents that are prepared by a lawyer in order to transfer a business.

In this series, we will review some of the central closing documents that are necessary to transfer a business, and explain the importance of each.

Closing Document – Section 116 of the Income Tax Act Statutory Declaration

Transfer a 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 whenever one 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. The reason for the declaration is because where the selling person was 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%. 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.Transfer a Business

If the Vendor however is indebted to the CRA for back taxes owing, 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 of 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% 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.


What is the Income Tax Statutory Declaration?
Section 116 Statutory Declaration is a closing document that attests that the vendor is not a non-resident of Canada under the Income Tax Act at the time a business transfer takes place.
What happens if the seller does not sign a S.116 Statutory Declaration?
The purchaser will be required to hold back 25% of the purchase price and remit it to the CRA within 30 days following the end of the month in which the transaction occurred.
What is a clearance certificate?
A clearance certificate is provided by the CRA to the Vendor when the Vendor is no longer indebted to the CRA for any taxes.

-Shira Kalfa, BA, JD, Partner and Founder

© 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.

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