Delays in getting a s. 116 certificate may necessitate a second CRA comfort letter

Given that CRA generally will not provide a vendor of taxable Canadian property with a clearance certificate before the remittance deadline specified in s. 116(5) (i.e., within 30 days of the month end of the acquisition), the vendor typically obtains a CRA comfort letter, which might state:

We are reviewing the application for a Certificate of Compliance. Please hold in trust, for the Receiver General, the tax withheld for the vendor as required by subsection 116(5) and/or 116(5.3) of the Income Tax Act until we finish our review. We will let you know how much tax is owing.

As long as we receive the payment within the time frame provided, we will not charge penalty and interest under subsections 227(9) and (9.3).

The certificate also might not be received by the balance-due date for the taxation year of the vendor in which the disposition occurred (usually, the end of February of the following year). If so, the non-resident vendor might typically request the purchaser to remit the requisite portion of the s. 116 escrow funds to CRA as an instalment of the purchaser’s liability under s. 116(5).

However, a cautious purchaser might be concerned that such a partial remittance would be contrary to the comfort letter, whose wording does not contemplate any remittances until a CRA request. This would generally result in the vendor being required to obtain, before the balance-due day, written confirmation from the CRA that a partial remittance by the purchaser of the s. 116 escrow tax will be applied as an instalment of the purchaser’s s. 116(5) liability.

Neal Armstrong. Summary of Wade Ritchie and Anu Nijhawan, “Section 116 Withholding Tax in Escrow: How Does a Vendor Pay Its Tax on Its Balance-Due Day?” International Tax Highlights, Vol. 3, No. 2, May 2024, p. 20 under s. 116(5).