US-Canada acquisitions: treaty gains article, tax forms and HSR

What to take away

How the structure decides tax, liability and filings

The structure answers three questions at once: who pays tax, who inherits liability, and which forms get filed.

In a share purchase the buyer takes the corporation whole, contracts, licences, employees and historic liabilities included. In an asset purchase the buyer names the assets it wants and leaves the corporate shell, and most of its history, with the seller. That trade-off is the whole argument in any share sale versus asset sale decision.

Canadian owners usually want a share sale. Proceeds can fall under the capital gains rules and the corporation's tax history stays with the corporation. US buyers usually want an asset purchase, because acquired assets can be stepped up to fair market value and depreciated or amortized for US tax purposes.

The gap between those two preferences is what gets negotiated. Price adjustments, indemnities, escrow and holdbacks exist to bridge it.

Payment mechanics matter as much as structure. When a US buyer cannot fund the whole price at closing, vendor take-back financing lets the Canadian seller carry part of the purchase price. That shifts both the timing of the gain and the credit risk onto the seller.

Before signing, read the target's customer contracts, leases and government permits for anti-assignment clauses. In an asset deal those clauses force a consent process that delays closing. In a share deal the same review becomes a change-of-control exercise.

Name the currency of every payment. Purchase price, escrow and earnout should each state the currency and the conversion date. Otherwise an exchange-rate swing between signing and closing quietly rewrites the economics.

IRS reporting duties on the US side

The IRS enters a cross-border deal through the buyer's return, the seller's return, and sometimes a standalone information return.

A US buyer that acquires stock in a Canadian corporation may owe an information return reporting the acquisition of a foreign corporation. A US shareholder in a foreign corporation may owe annual reporting on that interest. The form is named: U.S. citizens and residents who are officers, directors or shareholders in certain foreign corporations file Form 5471 and its schedules to meet the reporting requirements of sections 6038 and 6046 of the Internal Revenue Code. Whether a given buyer is caught depends on its ownership and role, which the form instructions set out.

Asset purchases are simpler. The buyer reports the acquired assets on its own return, allocates the purchase price across asset classes, and depreciates or amortizes what the rules allow. The allocation goes on Form 8594, the asset acquisition statement under section 1060: both the seller and the purchaser of a group of assets that makes up a trade or business file it where goodwill or going concern value attaches, or could attach, to the assets. No foreign corporation is created, so no foreign corporation reporting follows.

Withholding is the trap. A US buyer paying a Canadian seller can be treated as a withholding agent on certain income, and the treaty does not remove every withholding obligation. Confirm the position before the wire goes out, not after.

A US buyer with public shareholders adds a second layer. If the acquirer issues enough stock to fund the deal, Securities and Exchange Commission disclosure rules apply to the acquirer's own filings. If a broker-dealer places securities in the deal, Financial Industry Regulatory Authority oversight applies to that firm.

Valuation support is not optional. The IRS can challenge an allocation that shifts value into short-lived assets. An appraisal prepared under American Society of Appraisers or National Association of Certified Valuators and Analysts standards gives the buyer something to defend, and financial statements prepared under Generally Accepted Accounting Principles give the auditor a consistent base.

Canada Revenue Agency filings and withholding

The Canada Revenue Agency controls the exit. A non-resident seller generally cannot complete a sale of taxable Canadian property without telling the agency first.

A non-resident vendor files a notice with the Canada Revenue Agency before or soon after closing and receives a certificate of compliance. The request is made on Form T2062, the non-resident's certificate of compliance request, which covers the disposition of taxable Canadian property. Until that certificate issues, the buyer can be liable for unpaid tax, which is why the buyer withholds a share of the proceeds. The withheld amount is released when the certificate arrives.

Canadian resident sellers file differently. A corporation selling shares reports the gain on its corporate return. An individual reports it on a personal return, with a capital gains inclusion rate applied to the taxable portion.

Clearance certificates, tax returns and withholding certificates do not arrive on the same schedule. Build the closing timeline around the slowest one.

GST and HST can also apply. A sale of assets used in a commercial activity is generally a taxable supply; a sale of shares is not. A US buyer with no Canadian registration may still have to register and account for tax on the asset purchase. The CRA form to check is GST44, the GST/HST Election Concerning the Acquisition of a Business or Part of a Business, which is used to elect to not have GST/HST apply to the sale of a business or part of a business.

For a Canadian owner, the asset sale versus share sale question decides whether the corporation or the shareholder reports the gain, and whether the buyer inherits the tax history.

Deferred consideration complicates the Canadian side. An earnout or vendor note can push part of the gain into a later tax year, and the Canada Revenue Agency will look at whether the arrangement has commercial substance. The seller financing terms in the promissory note should be drafted with tax reporting in mind, not just the interest rate.

What the US-Canada tax treaty says about capital gains

The treaty keeps most business gains taxable in the seller's home country, with one large exception.

The treaty is the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital, and the capital gains article is Article XIII (Gains). Its paragraph 4 is the general rule: gains from the alienation of property other than that covered by paragraphs 1 to 3 are taxable only in the state where the seller resides.

The capital gains article generally lets the country where the seller resides tax a gain on shares, even when the shares are in a company operating in the other country.

A US resident selling shares in a Canadian corporation is generally taxed by the US, not Canada.

A Canadian resident selling shares in a US corporation is generally taxed by Canada.

The exception is real property. Gains on shares of a company whose value is mostly derived from real property in the other country can be taxed there. On the US side, a buyer acquiring a US real property interest from a Canadian seller can be the withholding agent under section 1445, and the withholding is reported and paid over on the Form 8288 series. Under the IRS rules on FIRPTA withholding, the rate of withholding generally is 15% of the amount realized. Article XIII spells this out: on the Canadian side, real property situated in Canada includes a share of a Canadian resident company the value of whose shares is derived principally from real property situated in Canada. A Canadian target holding US real estate, or a US target holding Canadian real estate, pulls that portion of the gain into the source country.

Treaty residence is not automatic. A company can be resident in both countries under domestic law, and the tie-breaker rules then decide. For companies the tie-breaker is Article IV (Residence), paragraph 3: a company created under the laws of one country but not the other is deemed resident only of the first; in any other case the two tax authorities settle residence by mutual agreement. That determination changes which country taxes the gain and which credits are available.

Relief from double tax comes through a foreign tax credit, not through exemption. The seller claims a credit at home for tax paid in the other country, subject to limits.

Asset sales are sourced differently from share sales. A sale of assets located in Canada by a US seller is generally sourced to Canada, so Canadian tax can apply even though the seller is a US resident. The treaty does not override that sourcing rule.

Where a gain is taxed in both countries, the order of the two filings matters. Pay the source country tax first, obtain the documentation, then claim the credit at home.

Merger control: HSR in the US and Canadian review

Two competition agencies look at a cross-border deal, and each runs its own test.

The US side runs on the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the statute that created premerger notification. The Federal Trade Commission's Premerger Notification Program administers the filing, and the statutory basis is set out in the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Hart-Scott-Rodino thresholds are size-of-transaction and size-of-person tests, adjusted annually. The FTC's steps for an HSR filing state them in statutory terms: if the transaction is valued at $50 million (as adjusted) or less, no filing is required; above $200 million (as adjusted), with no exemption, a filing must be made and the parties must wait until the statutory waiting period has expired before closing; in between, only transactions that also meet the size-of-person test require a filing. On the FTC's current HSR threshold table, the adjusted figures that take effect on February 17, 2026 are $133.9 million for the $50 million test, $535.5 million for the $200 million test, and $26.8 million and $267.8 million for the $10 million and $100 million size-of-person tests. The figures change every year, so check the table for the year of signing. A deal below both thresholds is not reportable, however large it looks strategically. A deal above them requires a filing and a waiting period before closing.

The Canadian side is different in shape. Canadian merger review thresholds turn on the target's assets or revenue in Canada and the size of the combined parties, and the Competition Bureau reviews the transaction. There is no filing in every case; the parties assess whether the thresholds are met.

Competition review is not the only Canadian approval. The Investment Canada Act, administered by Innovation, Science and Economic Development Canada, lets the government review the most significant investments by non-Canadians for net benefit to Canada, and review foreign investments of any size on national security grounds. A US buyer of a Canadian business should check it alongside the competition test. The Investment Canada Act thresholds for 2026 set the net benefit review threshold at $2.179 billion in enterprise value for investments to acquire control of a Canadian business by trade agreement investors that are not state-owned enterprises, and the Canada-United States-Mexico Agreement is one of the agreements that qualifies an investor.

A deal can clear one regime and fail the other. A US acquirer buying a small Canadian target may sit below the US thresholds but above the Canadian ones, because the Canadian test looks at the target's Canadian presence.

Timing drives the closing calendar. A US filing triggers a waiting period, and a second request can extend it by months. A Canadian review can run in parallel or after the US process. Build both into the agreement, with a long-stop date that reflects the slower regime.

Import and export licensing that travels with the target

A target's products can carry licensing obligations that survive the deal.

US export controls follow the item, not the owner. If the target ships controlled goods, software or technology from the United States, the licence requirement travels with the product after closing. The export license guidance published by USAGov sets out how an exporter applies and what the permit covers.

Dual-use items add a second layer. Goods with both commercial and military applications can need a licence even for a routine shipment to a stable destination.

Canada runs its own export permit regime. A Canadian target shipping controlled goods abroad needs Canadian authorization, and a change of control can require the permit to be reissued in the new owner's name.

Defense and aerospace targets face the strictest version. A US buyer acquiring a Canadian defense supplier may need to register under US ITAR rules, and the Canadian side may require an investment review.

Sharing controlled technical data with a US buyer during diligence can itself be a deemed export. Use clean teams and non-disclosure terms that address this before documents move.

A staged acquisition financing review helps here. A red-flag review can surface licence exposure early, and a full-scope review can confirm it before signing.

USMCA labor provisions and where they enter diligence

The USMCA replaced NAFTA, and its labor chapter carries obligations that reach into a target's operations.

The USMCA labor provisions require each party to enforce its own labor laws, and they create a facility-specific rapid response mechanism for certain claims. The US Department of Labor publishes USMCA labor information covering how those obligations are administered.

For a US buyer of a Canadian target, the exposure is usually indirect. A Canadian target with Mexican operations, or a supply chain that runs through Mexico, can face a labor complaint that disrupts supply.

Diligence should map the workforce. Union agreements, wage records, health and safety findings and any past labor complaints all belong in the file.

USMCA also sets rules of origin. A target that relies on USMCA preferential treatment for its exports has to show that its goods qualify. If the target's sourcing does not meet the rules, the buyer inherits a tariff exposure.

Labor exposure rarely kills a deal. It changes price, and it changes the indemnity. A buyer that finds a live labor dispute should price the disruption and hold back part of the consideration until it resolves.

Common questions

Does a US buyer of a Canadian company always need a Hart-Scott-Rodino filing?

No. A filing is required only when the transaction meets both the size-of-transaction and size-of-person thresholds, which are adjusted annually. Below both, the deal closes without a filing.

Who withholds tax when a Canadian resident sells shares to a US buyer?

For taxable Canadian property, the non-resident seller notifies the Canada Revenue Agency and the buyer withholds a portion of the proceeds. The withheld amount is released when a certificate of compliance issues.

Does the US-Canada tax treaty stop Canada from taxing the gain?

Usually for share gains, unless the target's value is mostly real property situated in Canada. Asset sales are sourced differently and can be taxed in Canada even for a US resident seller.

Can a target's export licence block the closing?

It can delay it. A change of control may require a licence to be reissued in the buyer's name, and controlled technical data shared during diligence can itself need authorization.