2026 federal budget: International tax measures

This article will be available in French shortly.

The 2026 federal budget introduces important changes to the tax rules that apply when non-residents dispose of taxable Canadian property. The proposed measures are intended to reduce withholding requirements and simplify compliance in certain transactions. Read on for a breakdown of the key changes and what they could mean for taxpayers.

Taxable Canadian Property: What’s changing?

Canada taxes non-resident persons on the disposition of taxable Canadian property (TCP). The government’s July 2026 tax measures proposed several key changes to the definition of TCP. Now, the 2026 federal budget proposes two additional measures, both of which will come as welcome changes to taxpayers. 

The first measure proposes to reduce the amount of taxes withheld. The second measure is designed to simplify withholding tax measures on related-party rollovers of TCP that occur under Section 85. 

Both measures would be effective from Jan. 1, 2027. 

How do the current withholding rules apply?

Under the current regime, and ignoring any relief under a tax treaty, a purchaser is obligated to withhold 25% on the gross purchase price if the property disposed of by the non-resident vendor is capital property (i.e., private company shares or certain public company shares if certain ownership and fair market value thresholds are met), or 50% if the property disposed of is specified TCP property (i.e., in simplified terms, this includes depreciable property, Canadian resource property, real property held as inventory, etc.). 

The purchaser of TCP is liable for failure to withhold unless a Section 116 certificate is filed within the prescribed time limits. A non-resident vendor of TCP must apply for the certificate within the prescribed time limits and no later than 10 days of closing. While the certificate is provided much later, it is common for the Canada Revenue Agency (CRA) to issue a comfort letter in advance. The purchaser must withhold and remit the required withholding to the CRA within 30 days after the month’s end disposal. Where a comfort letter is obtained, the purchaser may agree to withhold a reduced amount to the CRA and leave the remaining funds in escrow and release the remaining funds only upon receipt of the certificate. 

What withholding changes are proposed?

The current withholding tax and remittance rules do not account for different tax rates of different taxpayers (e.g., individuals/trust or corporate vendors). For example, in the case of a corporate vendor, the taxes withheld by the purchaser often exceed the vendor’s ultimate tax liability in Canada, creating cash flow issues because the taxes withheld and remitted cannot be recovered until the non-resident files their corporate return, which may occur several months later. 

Under the proposed changes, the 2026 federal budget proposes to reduce the amount of withholding required by the purchaser from 25% to 15% of the purchase price, or where a certificate is obtained, on the capital gain. In the case of specified TCP, this is reduced from 50% to 30% of the purchase price where no certificate is obtained or where a certificate is obtained in such amount as is acceptable to the CRA, which is the same as the old rules. 

Although the rules could be further simplified, this is welcome measure for non-resident vendors that have invested and sell TCP late.

What changes are proposed for Section 85 rollovers?

The next measure is designed to simplify compliance and withholding obligations for transfers of TCP that occur under Section 85. 

The 2026 federal budget proposes to exempt vendors and purchasers from withholding and tax remittance requirements for fully tax-deferred Section 85 rollover transactions. To benefit from this exception, within 30 days of the disposition, the Section 85 rollover form must be filed, and the purchaser is required to provide a notice to the CRA setting out information on the transaction and the vendor. 

Under the existing rules, the tax-deferred rollover treatment may be denied if, within three years, there is a subsequent disposition of the transferred property or substituted property and one of the main purposes of the transaction was to benefit from an exemption from Canadian tax (i.e., under a treaty). 

The 2026 federal budget proposes to extend this measure to five years where there is subsequent disposition of a property that derives its value from the transferred property or substituted property. While these rules are a welcome change, extension of the rules to five years may limit taxpayers from engaging in any tax-deferred transactions.