How a Canadian Limited Israeli Exit Tax on a Startup Sale

Result: Israeli exit tax fell only on the Israeli-residence slice of the gain, the acquirer released the full balance on an ITA certificate, and double taxation with Canada was eliminated · Timeline: about 4 months, cleared before the acquisition closed · Challenge: Israel sought exit tax on a gain that Canada also intended to tax in full · Authority: Israel Tax Authority, Canada Revenue Agency · Financial Impact: Israeli tax confined to roughly 60 percent of the gain instead of all of it, with no overlap left for Canada to double-tax

Background

A software engineer emailed us from Toronto with a problem most people would be glad to have and then a tax bill that threatened to ruin it. He had made aliyah from Canada in 2009, joined an early-stage Israeli company, and over the years built up a meaningful block of its shares. In 2020 he and his wife moved back to Canada for family reasons and resumed their Canadian lives. He kept the shares. He never sold them, never thought much about them, and assumed that when the day came he would pay Canadian capital gains tax like any other Canadian.

In early 2026 that day arrived. The company was being acquired, and his shares would pay out around USD 1.2 million. Then the acquirer's Israeli lawyers sent him a form mentioning Section 100A and Israeli withholding, and the comfortable Canadian assumption collapsed. He was now staring at the possibility that Israel would tax the whole gain on the way out, Canada would tax the whole gain as a resident, and the same dollars would be taxed twice.

The Challenge

Israel taxes people who leave. When a person stops being an Israeli tax resident, the law treats them as having sold everything they own the day before they left, and that deemed sale is the "exit tax." Most people defer it, which the law allows, so the tax is not actually paid until the asset is really sold. But deferral does not make the Israeli claim disappear. It parks it until the sale, and then Israel takes its slice of the gain.

Our client had left in 2020 and was selling in 2026, so the Israeli claim had been sitting dormant for six years and woke up the moment the deal was signed. The first danger was the withholding. Under Israeli law the acquirer's paying agent must deduct tax from the gross consideration unless the seller produces a certificate from the tax authority, and a deduction taken from USD 1.2 million gross would have frozen far more cash than he could possibly owe, with months of waiting to claw it back.

The second danger was double taxation. Canada, helpfully, treats someone who becomes a Canadian resident as having acquired their property at fair market value on the day they arrive, which is a step-up. So Canada only meant to tax the growth in the shares since 2020. The trouble is that Israel's exit tax, when deferred, does not measure the Israeli portion by the 2020 value. It uses a straight-line formula over the whole period the shares were held. If we did nothing, the Israeli formula and the Canadian step-up would not meet cleanly at 2020, and a band of gain would fall into both nets at once.

In Practice: Under Section 100A of the Income Tax Ordinance 1961, a person who ceases to be an Israeli resident is deemed to have sold all his assets one day before departure, and the default is to defer the tax to the real sale. The Israeli-taxable portion is then the whole gain multiplied by the period from acquisition to departure, divided by the period from acquisition to sale. On shares acquired in 2010, residency ending in 2020, and a sale in 2026, that fraction placed roughly 60 percent of the gain in the Israeli net. The Israel Tax Authority (Rashut HaMisim) assessing officer must approve the computation, which took about ten weeks here.

What We Did

We took the Israeli side and coordinated closely with his Canadian accountant, because neither country's result is safe until both are settled together.

We started with the withholding, because that was the clock that could not be stopped. We applied to the Israel Tax Authority for a withholding certificate (ishur nikui) that capped the deduction at the assessed Section 100A figure rather than a percentage of the gross price. That single certificate is what lets a non-resident seller actually receive the bulk of the proceeds at closing instead of watching them sit with the tax authority for a year.

We then built the exit-tax computation and supported it. We documented the acquisition date and cost of the shares, fixed the departure date in 2020 with the evidence that he had genuinely become non-resident, and ran the linear apportionment so the assessing officer could see exactly how the Israeli portion was reached. Where the straight-line formula threatened to overstate the Israeli slice against the real 2020 value, we put a contemporaneous valuation of the shares as at his departure in front of the officer to keep the Israeli figure honest and aligned with the Canadian step-up.

Finally we closed the gap with Canada. Between the Israeli exit tax limited to the pre-2020 period and the Canadian step-up limiting Canadian tax to the post-2020 period, the two systems were made to meet at the 2020 seam. For any residual overlap, the Canada-Israel tax treaty's relief mechanism allowed the Israeli tax to be credited in Canada, which his accountant claimed on the Canadian return. We have set out how the cross-border machinery fits together in our guide for Canadian residents under the Canada-Israel tax treaty, and the same principles drove the result here.

In Practice: Without a certificate, the acquirer's paying agent must withhold tax from the gross consideration under Section 164 of the Income Tax Ordinance 1961, which on USD 1.2 million would have tied up several times the real liability. We obtained a withholding ruling from the Israel Tax Authority capping the deduction at the assessed exit-tax figure, a process that ran about eight weeks. The Canada-Israel tax treaty then allowed Canada to credit the Israeli tax, so the band of gain at risk of double taxation was relieved rather than taxed twice.

The Outcome

The exit tax applied only to the slice of the gain attributable to his Israeli-residence years, roughly 60 percent, taxed at the capital gains rate on shares rather than to the whole USD 1.2 million. The withholding certificate meant the acquirer released the balance of his proceeds at closing instead of deducting tax on the gross. Canada, thanks to its 2020 step-up, taxed only the growth since his return, and the small zone of overlap was cleared by treaty credit. The same gain was not taxed twice, and nothing was paid that did not have to be.

Just as important, the position was settled before the deal closed rather than after. A Section 100A problem discovered after completion, with the money already distributed and the withholding already taken, is far harder and slower to unwind from another continent. For the background on how the exit charge itself works, our explainer on Israeli exit tax when leaving Israel walks through the deemed-sale rule and the deferral election.

Key Takeaways

What this case illustrates for non-residents in similar situations:

1. Leaving Israel does not switch off Israeli tax on what you owned there. Section 100A deems a sale on departure and simply defers the bill until you actually sell, which can be years later.
2. Israel taxes only the part of the gain attributable to your Israeli-residence years, but the default formula is a blunt straight-line apportionment. A contemporaneous departure-date valuation can stop that formula from overstating the Israeli share.
3. Get an Israeli withholding certificate before the sale closes. Without it, the buyer must withhold from the gross price, freezing far more cash than you owe and leaving a non-resident chasing a refund from abroad.
4. Canada's fair-market-value step-up on the day you became resident limits Canadian tax to post-arrival growth. Line that date up with the Israeli departure date and the two systems can be made to meet instead of overlapping.
5. Settle the cross-border position before completion, not after. Once the proceeds are distributed and the withholding is taken, fixing a Section 100A error from overseas is slow and expensive.

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Facing a Similar Situation?

If you once lived in Israel, still hold Israeli shares or other assets, and a sale or acquisition is on the horizon, the exit-tax question is best answered before the deal closes, when it can still be shaped.

Contact us for a confidential consultation about your Israeli legal matter.