Section 116 of the Tax Code: Clearance Certificates and Withholding

Section 116 of the Income Tax Act sets out what happens when a non-resident sells certain Canadian property: the seller must notify the Canada Revenue Agency and either pay or secure the tax on any estimated capital gain to obtain a certificate of compliance, and if the seller cannot produce that certificate at closing, the buyer must withhold a percentage of the purchase price and remit it to the CRA. These duties work together to keep sale proceeds from leaving the country ahead of the tax bill.

What Property Section 116 Covers

The rules apply to dispositions of “taxable Canadian property.” Real property in Canada is the most common example: a house, a cottage, or vacant land. The definition also reaches property used in a Canadian business, Canadian resource properties, timber resource properties, and shares of certain private corporations where more than 50% of the share value came from Canadian real estate or resource property at any time in the previous 60 months.¹ Publicly listed shares can be caught too if the seller and related persons held 25% or more of any class during that same 60-month window.

Excluded Property

Some assets a non-resident might own are fully outside section 116, so no certificate or withholding is needed. The main exclusions are listed securities (unless the 25% ownership threshold is met), mutual fund trust units, debt instruments such as bonds, debentures, notes, and mortgages, treaty-exempt property where a tax treaty shields the gain from Canadian tax, and property of a non-resident insurer or authorized foreign bank carrying on business in Canada.

Treaty-exempt status has a wrinkle worth flagging. If the buyer and seller are related parties, the buyer must send the CRA a separate notice within 30 days of the acquisition confirming the treaty exemption. Miss that notice and the property loses its excluded status.²

Who Counts as a Non-Resident

Residency for Canadian tax purposes turns on where your life is centered, not on citizenship or immigration status. You are generally a non-resident if you live in another country routinely and lack significant residential ties to Canada, such as a home, a spouse or common-law partner, or dependants residing there. The CRA looks at the whole pattern of your social and economic connections.

Canadian citizens who have permanently relocated abroad are treated the same as any other non-resident under section 116. A later sale of Canadian property triggers the full process. Borderline cases can be genuinely difficult, and the CRA can provide a formal determination of status when you are not sure.

The Seller’s Certificate of Compliance

Your goal as the non-resident seller is to obtain a certificate of compliance from the CRA. The certificate tells the buyer that tax on the gain has been paid or secured and releases the buyer from withholding. The process begins with Form T2062, “Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property.”³

What You Need Before You File

You need a Canadian tax identification number. A Social Insurance Number works if you previously lived in Canada. Otherwise, you may already have a Temporary Tax Number or an Individual Tax Number, and if you have none of these, apply for an Individual Tax Number separately so it does not hold up the disposition notice.⁴

Form T2062 asks for the buyer’s name and address, the anticipated sale price, and a calculation of the property’s adjusted cost base. The adjusted cost base is your original purchase price plus eligible additions like legal fees on the purchase and capital improvements over the years. Pull together the statement of adjustments from your original purchase, receipts for major renovations, and records of legal or survey costs. Those figures drive the estimated capital gain the CRA uses to set how much tax you must pay or secure.

Timing and Payment

You can file the notice before the sale closes or within 10 days after closing. Filing before closing is far better. Late filing carries a penalty of $25 per day, with a minimum of $100 and a maximum of $2,500.⁵ The more practical reason to file early is that the CRA will not issue the certificate until you pay 25% of the estimated gain or provide acceptable security. Negotiating security means contacting the Revenue Collections Division at the relevant tax services office; a simple letter of undertaking does not qualify.⁶ The CRA recommends submitting the notice at least 30 days before closing so officers have time to review it.

Buyer Withholding Obligations

If you are buying from a non-resident and the seller has not produced a valid certificate at closing, you are personally responsible for withholding. The rate depends on the property:

25% of the purchase price for non-depreciable taxable Canadian property, which covers most standard real estate held as a personal or investment asset.²
50% of the purchase price for depreciable property, Canadian resource properties, timber resource properties, and other categories listed in subsection 116(5.2).²

Where a certificate has been issued but the purchase price exceeds the certificate limit, withholding applies only to the excess, not the full price. In most real estate deals, the withheld funds sit in the closing lawyer’s trust account while the certificate is pending.

Remittance Deadline and Comfort Letters

You must remit the withheld amount to the Receiver General within 30 days after the end of the month in which you acquired the property.² Close on March 15 and the deadline is April 30. If you fail to remit, the CRA can assess you personally for the full amount plus interest and penalties, with no time limit on when that assessment can be issued.⁶

When the seller has filed a T2062 but the certificate has not arrived before the remittance deadline, you can request a “comfort letter” from the CRA. This administrative acknowledgement confirms the vendor’s application is under review and lets you continue to hold the funds in trust without penalty for the delay. Getting one in time is often difficult in practice, because the CRA does not issue them automatically and reaching the right officer before the deadline can take considerable effort. Raising the issue with your lawyer early in the transaction is the best defense.

The Underused Housing Tax Trap for Residential Property

Non-residents selling residential property face an additional obstacle. Under subsection 116(8), the CRA can refuse to issue a certificate of compliance if the seller has not filed all required Underused Housing Tax returns or paid all UHT amounts owing on that property.² The CRA can also block the certificate if it has reasonable grounds to believe you will owe UHT for the calendar year before the sale, even if that return is not yet due.

Even if you qualify for an exemption from the UHT itself, you still have to file the annual UHT return for any residential property you own as a non-resident. Missing those returns creates a separate penalty problem, and it can directly stall your section 116 certificate and leave the buyer’s funds locked in escrow.⁴

Filing a Canadian Tax Return After the Sale

Obtaining a certificate and having tax withheld does not close out your obligations. You still need to file a Canadian income tax return for the year of the sale. Individuals use Form T1; corporations use Form T2. The return is due by April 30 of the following year, or June 15 if you or your spouse carried on a business in Canada, though any balance owing is still due by April 30.⁷

On the return you report the actual capital gain using your real sale price and adjusted cost base, not the estimates from the T2062. Anything the buyer remitted to the CRA on your behalf counts as a credit against your final tax bill. If that credit is more than what you actually owe, the CRA refunds the difference. This happens regularly, because withholding is calculated on the gross purchase price (or the excess over the certificate limit), while actual tax is calculated on the gain alone at the applicable capital gains inclusion rate, which remains at 50%.

Penalties for Non-Compliance

The consequences fall differently on each side, and neither is theoretical.

Sellers

A non-resident who fails to notify the CRA within 10 days of closing faces a penalty of $25 for each day the notice is late, with a floor of $100 and a ceiling of $2,500.⁵ Beyond the penalty, the CRA will not issue the certificate until payment or security is in hand, meaning the buyer remains bound to withhold and may already have remitted the funds.

Buyers

A buyer who fails to withhold and remit when required can be assessed for the full amount that should have been withheld, plus interest and penalties. These assessments have no time limit, so the CRA can come after the buyer years later.⁶ The only defense is that, after reasonable inquiry, the buyer had no reason to believe the seller was a non-resident. Most real estate lawyers address this by requiring a statutory declaration of residency, or by holding back the withholding amount in trust whenever non-residency is possible.

1
Justice Laws Website. Income Tax Act RSC 1985, c 1 (5th Supp) – Section 248
2
Justice Laws Website. Income Tax Act RSC 1985, c 1 (5th Supp) – Section 116
3
Canada Revenue Agency. T2062 Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property
4
Canada Revenue Agency. Disposing of or Acquiring Certain Canadian Property
5
Canada Revenue Agency. Failure to Comply Penalty – Non-Resident Vendor Notification on Disposition of Taxable Canadian Property
6
Canada Revenue Agency. Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada – Section 116
7
Canada Revenue Agency. Non-Residents of Canada