Section 116 Clearance Certificates: Relief for Treaty-Exempt and Treaty-Protected Property

A non-resident of Canada is generally taxable under the Income Tax Act (Canada) (Act) on any income or gains arising on the disposition of taxable Canadian property (TCP),1 except where the non-resident is entitled to a treaty exemption.

The provisions of section 116 of the Act are intended to ensure that the non-resident vendor pays any income tax arising from the disposition of TCP. Section 116 is of current interest not only because of recent amendments to the Act which are relevant to the section but also in light of the aggressive approach taken by the Canada Revenue Agency (CRA) to timely compliance with the requirements of the section even where no underlying tax is payable by the vendor.2

Section 116 generally requires that — unless the vendor has obtained a section 116 "clearance certificate" from the CRA (which typically requires that the vendor pay an amount on account of the potential tax liability) — the purchaser of TCP from a non-resident vendor remit a portion of the purchase price to the CRA on account of the vendor’s potential tax liability. The provision also entitles the purchaser to withhold that amount from the purchase price.

An exception from the requirements of section 116 has long existed for property that is so-called "excluded property." Fairly recent amendments to the Act have expanded the concept of excluded property to include "treaty-exempt property" and, where a purchaser complies with a notice requirement, have provided an additional exception applicable to the purchaser in respect of "treaty-protected property."3

As the "treaty-protected property" and "treaty-exempt property" provisions in section 116 have not been subject to a comprehensive review since their enactment, this article provides a brief overview of the provisions and offers some cautionary comments.4

Treaty-Exempt Property

As noted previously, section 116 does not apply where a non-resident disposes of property that is "excluded property" of the non-resident at the time of the disposition.5 On or after January 1, 2009, such property includes a property that is a "treaty-exempt property" of the non-resident.6

A property will be treaty-exempt property of the non-resident if:7

  1. the property is "treaty-protected property" of the non-resident. Treaty-protected property is defined as "property any income or gain from the disposition of which by the taxpayer at that time would, because of a tax treaty with another country, be exempt from tax under Part I";8 and
  2. where the purchaser and the non-resident are related for purposes of the Act, the purchaser provides to the CRA, on or before the date that is 30 days after the date of the acquisition, a notice9 setting out:
  • the date of the acquisition;
  • the name and address of the non-resident person;
  • a description of the property sufficient to identify it;
  • the amount paid or payable, as the case may be, by the purchaser for the property;10 and
  • the name of the country with which Canada has concluded a tax treaty under which the property is treaty-protected property.11

Since both conditions summarized above must be satisfied, property will not be excluded property by virtue of the treaty-exempt property exception if the parties are related and the notice is late-filed12 or the parties fail to file the notice. Further, property may not be excluded property where the vendor is not a resident for purposes of the relevant treaty or if, contrary to the understanding of the parties, the treaty does not exempt the sale from Canadian taxation.

Determining whether property is "treaty-protected property" can be a complicated issue and the facts needed to make such a determination may not be known to the purchaser or even the vendor in some circumstances.

In respect of the notice requirement, a vendor and purchaser could become "related" for purposes of the Act through rights that arise in the course of a purchase and sale transaction, thereby requiring a notice to be filed for the property to be treaty-exempt property. This would generally be the case if both the purchaser and the vendor are corporations and the property being sold is the vendor’s controlling interest in a corporation. In that instance, both the vendor and the purchaser will be related to the controlled corporation and, therefore, would be related to each other by virtue of the application of subparagraph 251(2)(b)(ii), subsection 251(3) and paragraph 251(5)(b) of the Act.

Accordingly, taxpayers need to be extremely careful when relying on the treaty-exempt property provision as an exception to section 116.

Treaty-Protected Property where Notice Provided to CRA

As noted previously, a treaty-protected property exception may protect the purchaser where the TCP is not excluded property.13 However, to obtain this protection, the purchaser must file a notice even where the vendor and the purchaser are not related for purposes of the Act.

This exception requires that the following conditions be satisfied:

  1. the purchaser concludes after reasonable inquiry that the non-resident person is, under a tax treaty that Canada has with a particular country, resident in the particular country;14
  2. the property would be treaty-protected property of the non-resident person if the non-resident person were, under the tax treaty referred to in the prior paragraph, resident in the particular country;15 and
  3. the purchaser provides notice to the CRA in respect of the acquisition as contemplated in item 2 above under the heading "Treaty-Exempt Property."16

In respect of this exception:

  1. the safe harbour protection is afforded to the purchaser but not to the vendor;
  2. in respect of the "reasonable inquiry" contemplated above, the CRA has stated that it generally will accept that the purchaser has made reasonable inquiry if Part D of Form T2062C — "Notification of an Acquisition of Treaty-Protected Property from a Non-Resident Vendor" is completed by the vendor or an equivalent declaration is obtained from the vendor;17
  3. the safe harbour relates only to the residence of the vendor (i.e., whether the non-resident is, in fact, a resident of a treaty country) and not the status of the property (i.e., whether the property would be treaty-protected property of the non-resident person assuming that the non-resident person were resident in a particular country under the relevant tax treaty);18 and
  4. the protection afforded to a purchaser requires the purchaser to provide notice to the CRA whether or not the vendor and purchaser are related for purposes of the Act.19

Additional Comments

The "treaty-protected property" and "treaty-exempt property" provisions are welcome provisions; however, they should only be relied upon after careful consideration and do not preclude the need for a section 116 analysis where a gain is thought to be treaty-exempt. Out of an abundance of caution, purchasers may insist that notice be provided as contemplated previously under the heading "Treaty-Exempt Property," even where the parties are not related for purposes of the Act and it is thought that the property qualifies as "treaty-exempt property." In some cases, where there is material doubt as to a vendor’s entitlement to an exemption under a treaty other than by reason of the vendor’s residence status, a purchaser may wish to insist that the normal provisions of section 116 be complied with, including that the vendor obtain a section 116 clearance certificate.


1 Very substantial changes to what constitutes TCP as defined in subsection 248(1) of the Act were recently enacted, effective after March 4, 2010. For most non-residents, TCP for purposes of section 116 typically will be only:

  • real property situated in Canada, whether capital property or inventory;
  • shares, partnership interests or interests in trusts where more than 50% of the fair market value of such shares, partnership interests or interests in trusts is (or was at any time within the prior 60 months) derived from any combination of Canadian real property, Canadian resource property, timber resource property or options in respect of or interests in such property; or
  • options in respect of or interests in such properties.

2 A failure to comply with the section 116 clearance certificate regime can expose each of the vendor and the purchaser to substantial penalties.

3 The concepts of "treaty-protected property" and "treaty-exempt property" are defined in subsections 248(1) and 116(6.1), respectively. The concepts were introduced in respect of dispositions on or after January 1, 2009.

4 For a more detailed discussion, see Chris Falk and Stefanie Morand, "Section 116 Clearance Certificates," 2010 British Columbia Tax Conference, (Vancouver: Canadian Tax Foundation, 2010) on which many of these comments are based.

5 Subsections 116(1), (3), (5), (5.2) and (6).

6 Simplified, "excluded property" also includes the following:

  • deemed TCP;
  • inventory of a business carried on in Canada, other than inventory that is real property situated in Canada, a Canadian resource property or a timber resource property;
  • a share that is listed on a recognized stock exchange;
  • a unit of a mutual fund trust;
  • a bond, debenture, bill, note, mortgage or similar obligation;
  • an option or interest in such a property.

7 Subsection 116(6.1).

8 Subsection 248(1).

9 The notice is filed under subsection 116(5.02). No prescribed form exists for purposes of this provision; however, the CRA has stated that purchasers can use Form T2062C, "Notification of an Acquisition of Treaty-Protected Property from a Non-Resident Vendor."

10 In some cases, the purchase price of property will include a contingent or variable component that is not known until well after the due date for the subsection 116(5.02) notice. In these circumstances, the CRA has stated that it will consider the purchaser to have complied with subsection 116(5.02) provided that:

    • the purchaser files a notice as required under subsection 116(5.02) within the time allowed;
    • the amount set out on the notice as paid or payable by the purchaser includes a portion that has been estimated;
    • the fact that the amount on the notice includes a portion that has been estimated is indicated on the notice; and
    • if the actual amount paid or payable turns out to be different than the estimated amount, a revised notice (together with a copy of the original notice and a brief explanation) is filed by the purchaser forthwith (see CRA Document No. 2009-0347711C6, dated December 8, 2009.

    11 A notice requirement does not exist where the purchaser and the non-resident are not related; however, for the reasons discussed under the above heading "Treaty-Protected Property where Notice Provided to CRA," it may be in the purchaser’s best interest to provide notice nonetheless.

    12 Late-filed notices are not permitted. Accordingly, if the notice is not provided on a timely basis, the property would not be excluded property by reason of the treaty-exempt property provision.

    13 Subsection 116(5.01).

    14 Paragraph 116(5.01)(a). In respect of this condition, the CRA has provided at least a tentative indication that it may be prepared to accept this procedure for a US limited liability company (LLC) that is a "look through" vehicle for US federal income tax purposes (and therefore one that the CRA would maintain would fail the residence test), provided that all members of the LLC are US residents entitled to the benefits of the Canada-US treaty where the purchaser files a Form T2062C (see CRA Document No. 2009-0317371I7, dated July 16, 2009).

    15 Paragraph 116(5.01)(b).

    16 Paragraph 116(5.01)(c). Notice is provided under subsection 116(5.02).

    17 See, for example, the general information section of Form T2062C.

    18 At the 2009 British Columbia Tax Conference (Questions and CRA Responses, 2009 BCC p.16:10/11), the CRA provided some limited comfort in respect of the status of the property, stating as follows :

    For the purpose of the treaty-protected status of a property, the tax legislation does not provide any protection to the purchaser. However, the CRA will generally not raise a purchaser liability assessment in situations where the purchaser has made a good faith attempt to determine that the property is in fact treaty protected. A simple statement from the vendor claiming that the property is treaty-protected is not enough to demonstrate good faith. For example: in the case of shares of a Canadian corporation, the purchaser should obtain a declaration from the corporation certifying that the value of the shares is not principally derived from Canadian real property, Canadian resource property or timber resource property. In general, purchasers should carefully review the applicable tax treaty along with the section titled Treaty-Protected Property in the general information provided on Form T2062C and follow the guidance provided.

    We cannot state that we will never raise a purchaser assessment in any particular circumstances. We will have to review each situation on its own merit.

    19 See discussion under the above heading, "Treaty-Exempt Property."

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