What Is a Tax Clearance Certificate, and Do You Need One When Selling a Business in Canada?
A CRA tax clearance certificate is a document issued by the Canada Revenue Agency confirming that a seller has satisfied or secured their Canadian tax obligations in connection with a property disposition. There are two types relevant to business sales in Canada. Under ITA s. 116, a clearance certificate is mandatory when a non-resident of Canada sells taxable Canadian property, including shares of a Canadian corporation, and releases the buyer from a statutory obligation to withhold and remit 25% of the purchase price to the CRA. Under ITA s. 159, a clearance certificate is required when a legal representative (such as a trustee or executor) distributes the assets of an estate or wound-up corporation. Canadian resident sellers are not required to obtain a clearance certificate under s. 116, but there are circumstances where obtaining one is strongly advisable for both parties.
The Two Types of Clearance Certificates
Type 1: The Section 116 Certificate (Non-Resident Sellers)
ITA s. 116 applies when a non-resident of Canada disposes of “taxable Canadian property.” Shares of a private Canadian corporation are taxable Canadian property. When a non-resident sells such shares, the buyer is required by law to withhold a portion of the purchase price and remit it to the CRA unless the seller has obtained a s. 116 clearance certificate before closing.
The withholding rate is generally 25% of the purchase price (or the portion attributable to taxable Canadian property). Without a clearance certificate, the buyer must withhold 25% of the gross proceeds, regardless of how much tax the seller actually owes. CRA holds the withheld amount against the seller’s ultimate tax liability on the disposition.
The clearance certificate is applied for by the non-resident seller using CRA Form T2062 (Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property). For dispositions of depreciable property (relevant in asset sales), the form is T2062A.
Why the certificate matters so much: under s. 116, the withholding obligation falls on the buyer, not the seller. If a buyer closes a transaction with a non-resident seller and fails to withhold, the buyer becomes personally liable for the 25% amount even if the seller has already received and spent the purchase price. This is one of the most significant traps in Canadian private M&A, and it is entirely the buyer’s problem if a clearance certificate is not obtained.
Type 2: The Section 159 Certificate (Legal Representatives)
ITA s. 159 applies in a different scenario: when a “legal representative” distributes property on behalf of a taxpayer. A legal representative includes an executor of an estate, a trustee in bankruptcy, a receiver, and, importantly for business sales, a corporation that has been wound up or is in the process of distributing its assets to shareholders.
In the context of a business sale structured as an asset sale followed by a wind-up of the selling corporation, the corporation (acting as a legal representative when distributing sale proceeds to its shareholders) may be required to obtain a s. 159 clearance certificate before making that distribution. Without it, the representative can be held personally liable for any tax owing by the corporation that was not paid before distribution.
Section 159 certificates are less commonly discussed in the M&A context than s. 116, but they are relevant in any transaction where the selling corporation distributes proceeds to shareholders after an asset sale. A lawyer advising on an asset sale should assess whether a s. 159 application is required or advisable.
Does Every Seller Need a Clearance Certificate?
Non-resident sellers: yes, in all cases involving taxable Canadian property. The s. 116 withholding obligation is automatic and statutory. It does not depend on whether the seller owes any tax; it applies to the gross purchase price. A non-resident seller who does not obtain a clearance certificate before closing creates a significant liability problem for the buyer and will receive 25% less of their proceeds at closing while they wait for CRA to process the withholding and issue a refund (if any is owed).
Canadian resident sellers: not required under s. 116. There is no statutory obligation for a Canadian resident seller to obtain a s. 116 clearance certificate. The withholding mechanism under s. 116 exists specifically to address the CRA’s limited ability to collect tax from non-residents after they leave Canada with the proceeds.
However, Canadian residents may still benefit from a clearance certificate in certain circumstances:
- Where the selling corporation is winding up after an asset sale and distributing proceeds to shareholders, a s. 159 clearance certificate may be required or advisable before that distribution is made
- Where the purchase agreement requires the seller to deliver a clearance certificate as a condition of closing (some buyers, particularly institutional or sophisticated acquirers, include this requirement even for Canadian resident sellers as a belt-and-suspenders measure)
- Where there is any uncertainty about outstanding CRA obligations (an open audit, a disputed assessment, or unfiled returns) and the seller wants to ensure the buyer has no withholding concerns
How to Apply for a Section 116 Clearance Certificate
The process for a non-resident seller obtaining a s. 116 clearance certificate involves the following steps:
Step 1 File Form T2062 with CRA: The seller (or their Canadian tax representative) files Form T2062 with the CRA International Tax and Non-Resident Services office before the disposition closes. The form requires the non-resident to provide details of the property being sold, the estimated proceeds, the adjusted cost base, the estimated gain, and the estimated tax owing.
Step 2 Provide security to CRA (if required): If CRA determines that tax is likely owing, it will require the non-resident to provide security (typically a bank draft or letter of credit) for the estimated tax before issuing the certificate. The security amount is based on the estimated Canadian tax on the gain from the disposition.
Step 3 CRA issues the certificate: Once satisfied that tax has been paid or adequate security provided, CRA issues the clearance certificate. The certificate specifies the property to which it relates and releases the buyer from the withholding obligation for that property.
Step 4: Deliver the certificate to the buyer at or before closing: The purchase agreement typically requires delivery of the clearance certificate as a condition of closing. The buyer releases the withheld amount (or waives the withholding requirement) upon receipt.
How long does it take?
CRA processing times for s. 116 clearance certificate applications are typically three to six months. In some cases, where the CRA office is backlogged, processing can take longer. Non-resident sellers should apply as early as possible, ideally when the deal process begins rather than when the LOI is signed. A delay in the clearance certificate is one of the most common causes of missed closing deadlines in transactions involving non-resident sellers.
What Happens Without a Clearance Certificate
For the buyer: Without a clearance certificate, the buyer must withhold 25% of the purchase price attributable to taxable Canadian property and remit it to CRA within 30 days of the end of the month in which the closing occurs. Failure to do so makes the buyer personally liable for the withheld amount, plus interest and potential penalties. This liability is personal to the buyer and cannot be recovered from the seller if the purchase price has already been paid out in full.
In practice, buyers transacting with non-resident sellers address this in one of two ways: (a) they withhold 25% at closing and remit it to the CRA, releasing the holdback to the seller only after the CRA processes the application and issues a refund or clearance, or (b) they require the clearance certificate as a condition of closing and refuse to close until it is in hand.
For the seller: A non-resident seller without a clearance certificate at closing will receive 25% less than the purchase price on closing day. That 25% goes to CRA as a holdback. CRA then assesses the actual tax owing, applies the withheld amount against it, and refunds any excess. Depending on the seller’s actual Canadian tax liability, the refund process can take months during which the seller does not have access to a significant portion of their proceeds.
In an extreme case where the non-resident seller’s actual tax owing is minimal (for example, due to a low cost base but significant LCGE-equivalent planning), a large sum sits with CRA earning no return for the seller while the refund is processed.
For the deal: Missing the clearance certificate often derails a closing. Sophisticated buyers will not close with a non-resident seller without a certificate. Deals where the certificate has not been applied for far enough in advance regularly face delayed or conditional closings while all parties wait for CRA to process the application.
Section 116 and LCGE: A Common Misconception
Non-resident sellers sometimes assume that because their gain might be sheltered by the LCGE (if their shares qualify as QSBC shares and they are individual Canadian taxpayers), the withholding obligation under s. 116 does not apply. This is a misunderstanding.
The LCGE is a personal income tax deduction claimed on an individual’s T1 return. The s. 116 withholding is a statutory mechanism that applies to the gross proceeds, not the net taxable amount. Even if the seller’s ultimate tax on the disposition is zero after applying the LCGE, the buyer is still required to withhold 25% of the purchase price unless a clearance certificate has been issued.
The LCGE and the clearance certificate are separate processes. A non-resident seller who qualifies for the LCGE still needs a clearance certificate. The certificate process will ultimately result in a full refund of the withheld amount (since no tax is owed), but that refund may take months.
How Kalfa Law Firm Helps
Kalfa Law Firm advises both sellers and buyers on CRA clearance certificate requirements as part of every business sale mandate. For sell-side clients, we identify whether a clearance certificate is required, manage the T2062 application process, liaise with the seller’s tax advisors to ensure the application is accurate and complete, and coordinate the certificate delivery with the closing timeline. For buy-side clients, we identify non-resident seller risk early in the diligence process, include the appropriate representations and closing conditions in the SPA, and ensure the withholding mechanics are correctly documented.
A missed clearance certificate is the kind of problem that is entirely avoidable and very expensive when it is not.
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Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and private M&A law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law.
© Kalfa Law Firm | August 6, 2026
The above provides information of a general nature only. This does not constitute legal or accounting 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.
