Canada proposes lower section 116 withholding for corporate property disposals

Canada’s current Income Tax Act section 116 supports collection of tax when a non-resident disposes of taxable Canadian property. Subject to certificates and statutory exceptions, a purchaser can be liable to remit 25% of the purchase price for ordinary taxable Canadian property and 50% for specified property, including certain depreciable, resource and inventory property. A vendor disposing of relevant property must generally notify the Canada Revenue Agency within ten days unless the pre-disposition notification conditions are met.^[2][4]

Lower proposed rates for corporate vendors

For dispositions after 2026, the motion would add subsections 116(5.5) and (5.6). Where the vendor is a corporation—or the purchaser, after reasonable inquiry, had no reason to believe otherwise—the purchaser-liability rate would fall from 25% to 15% for property governed by subsection 116(5), and from 50% to 30% for specified property governed by subsection 116(5.3). The amount required from a corporate vendor to obtain a clearance certificate for ordinary capital property would likewise fall from 25% to 15% of the gain. The existing CRA-acceptable-amount rule would remain for specified property.^[2][3]

Section 85 rollover process

The proposal would also relieve fully tax-deferred section 85 transfers. New subsection 116(5.011) would apply where section 85(1) or (2) governs the acquisition and, within 30 days, the parties have made the relevant election, the purchaser concludes after reasonable inquiry that no amount from the disposition enters the vendor’s taxable income earned in Canada, and the purchaser provides the prescribed section 116(5.02) notice. An amended election that creates taxable income would reactivate the notification and remittance rules under proposed subsection 116(5.012).^[3]

Related anti-avoidance extension

A related amendment to section 69 would strengthen the anti-avoidance rule for non-resident rollovers of taxable Canadian property. Its monitoring period would increase from three to five years and would extend to property deriving more than 50% of its value from the transferred or substituted property. These amendments would also apply to dispositions after 2026.^[2][3]

Practical effect

Multinational groups planning Canadian real-estate, resource-property or property-rich entity transactions should distinguish the proposed cash-flow relief from the underlying Canadian tax liability. Transaction documents should identify the vendor’s corporate status, property category, treaty or excluded-property position, certificate strategy and any section 85 election. The Budget and motion are proposals: present section 116 rates and procedures continue until legislation is enacted.^[3][4]