Section 116 Certificate on Transfer of Purchase Agreement

  • October 09, 2014
  • David M. Sherman, LLB LLM

All real estate lawyers know that if real property is being sold by a non-resident of Canada, the purchaser is required to withhold 25% tax from the purchase price unless the vendor supplies a “section 116 certificate” as required by the Income Tax Act (ITA).

Did you know that this rule may also apply to the sale of an interest in real property, such as a purchaser’s right under an Agreement of Purchase and Sale (AP&S)?

Suppose X, a non-resident, enters into an AP&S to buy a new condominium, to be built. The purchase price is $300,000. The agreement is assignable to a new purchaser with the builder's consent.

Two years later, before the condo is ready for occupancy or closing, X sells her rights under the AP&S to Y, a Canadian resident, for $50,000 (i.e., reflecting that the completed condo value has gone up to $350,000). The builder consents to this transfer, and Y thus acquires X’s right to pay $300,000 for the condo.

Under the ITA, this is a sale of “taxable Canadian property”, which is defined in ITA subsection 248(1) to include, in paragraph (f), an “interest in” real property situated in Canada. (Under Ontario law, a purchaser’s right to purchase real property is an “interest" in real property: 676658 Ontario Inc. v. Wes-Li Gardens Inc., 2007 CanLII 1859 (ONSC), para. 22.)

Therefore, a section 116 certificate is likely needed. Without one, Y may be liable to the Canada Revenue Agency for 25% of the purchase price ($12,500 in this example).

Relief can be available by tax treaty, depending on X’s country of residence. However, if X is resident in the United States, Canada is likely permitted by Art. XIII:1 of the Canada-US Tax Treaty to tax the capital gain. Art. XIII:3(b)(i) defines “real property situated in Canada” with reference to Article VI, and Art. VI:2 defines real property to include “any option or similar right in respect thereof”. X’s interest in the AP&S is likely a “similar right”, so the property is likely not “treaty-protected property”. Even if it is, however, relief from section 116 is available only if the CRA is notified of the transaction within 30 days after closing: ITA subsection 116(5.02).

There is no limitation period on an assessment for failing to withhold under section 116 (ITA subsection 227(10.1)), so if tax is not withheld, the CRA could come after the purchaser many years later.

So if you are acting for a purchaser who is buying a right to purchase an unfinished condo or other property, make sure to consider whether the vendor is non-resident so that a section 116 certificate is needed!

About the Author

David M. Sherman, tax lawyer, author and consultant, Toronto, www.davidsherman.ca.
Mr. Sherman is author and editor of numerous Carswell publications on tax law, including the Practitioner’s Income Tax Act, Practitioner’s Goods and Services Tax Annotated, Canada GST Service, Lawyer’s Guide to Income Tax and GST/HST, and many others. His client work consists primarily of advising lawyers and accountants on technical tax and GST/HST issues, and representing taxpayers in disputes with the CRA.

 

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