- Canada taxes non-residents on gains from the sale of taxable Canadian property (TCP), which includes Canadian real estate.
- A clearance certificate under section 116 of the Income Tax Act is a CRA document confirming that the non-resident seller has either: - Paid the estimated capital gains tax owing on the…
- , a vacant lot or principal residence): the buyer must withhold 25% of the purchase price These percentages apply to the gross purchase price, not to the gain.
Selling a home, cottage, or investment property in Ontario is already a complicated transaction. When the seller is a non-resident of Canada, a layer of federal tax compliance is added that catches many buyers and sellers completely off guard. If you do not obtain a section 116 clearance certificate before (or promptly after) closing, the buyer is legally required to withhold a substantial portion of the purchase price and remit it to the CRA — whether or not you have actually made a profit.
This article walks through the section 116 process, what the withholding obligations mean in practice, and how to navigate the timeline to avoid delays on closing day.
Why Canada Withholds on Non-Resident Property Sales
Canada taxes non-residents on gains from the sale of taxable Canadian property (TCP), which includes Canadian real estate. Unlike Canadian residents who report the gain on their annual tax return, non-residents might leave the country after closing and never pay — so the Income Tax Act creates a collection mechanism at source.
The mechanism: the buyer is responsible for withholding a percentage of the purchase price and remitting it to the CRA within a short window after closing, unless the seller provides a clearance certificate showing that a tax remittance arrangement is in place.
What Is a Section 116 Clearance Certificate?
A clearance certificate under section 116 of the Income Tax Act is a CRA document confirming that the non-resident seller has either:
- Paid the estimated capital gains tax owing on the sale, or
- Posted acceptable security for the estimated tax
Once the certificate is issued, the buyer is released from their withholding obligation (or, if withheld funds are already with the CRA, the excess is refunded to the seller).
The seller's real estate lawyer should apply for the certificate well before closing. Processing times vary and the CRA can take weeks or longer; delays in obtaining the certificate can hold up closing or require the buyer to withhold pending receipt. Confirm current CRA processing times early in your transaction.
What the Buyer Must Withhold Without a Certificate
If no clearance certificate is in hand at closing (or if the buyer does not receive one within the required notice period):
- For depreciable property (rental property, commercial real estate): the buyer must withhold 50% of the purchase price (as of writing — verify the current rate with CRA)
- For other real property (e.g., a vacant lot or principal residence): the buyer must withhold 25% of the purchase price
These percentages apply to the gross purchase price, not to the gain. On a $800,000 property, that means the buyer withholds $200,000 (or $400,000 for depreciable property) — regardless of whether the seller paid $750,000 for it ten years ago and owes tax on only $50,000 of gain. This is why obtaining the clearance certificate before closing is so important.
The withheld amount must be remitted to the CRA within a short period after the closing date (as of writing — verify the current deadline with CRA or your lawyer).
The Application Process: Form T2062
To apply for a clearance certificate, the non-resident seller (or their representative) files Form T2062 (Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property) with the CRA's international tax office. The form requires:
- Description and address of the property
- Sale price and adjusted cost base
- Calculation of the estimated capital gains tax
- Remittance of that estimated tax (or security)
If the property is a rental or depreciable property, there may be recaptured CCA (capital cost allowance/depreciation) to account for as well — this is taxed as income, not as a capital gain, and requires Form T2062A in addition to T2062. Ensure your tax preparer calculates both.
The Principal Residence Exemption for Non-Residents
If the property was your principal residence for some years while you were a Canadian resident, you may be able to claim the principal residence exemption for those years, reducing or eliminating the taxable gain. The number of years eligible for the exemption is calculated on a formula — professional advice is needed to maximize it.
Note: since 2016, the principal residence exemption must be reported on your Canadian tax return even when the gain is fully sheltered. Failing to report it can affect your ability to claim the exemption.
Filing the Final Canadian Tax Return
After the clearance certificate process, the non-resident must file a Part I Canadian tax return (essentially a T1 non-resident return) for the year of sale, reporting the actual gain and claiming the actual deductions. The taxes estimated for the clearance certificate are typically based on early numbers; the final return reconciles the actual amount owing and may result in either a refund or a balance due.
This return is separate from any ongoing non-resident withholding tax obligations on rental income from the property during the years you owned it.
What Sellers and Buyers Both Need to Know
Sellers: Start the clearance certificate process as early as possible — ideally as soon as you accept an offer. Give your Ontario real estate lawyer immediate notice that you are a non-resident. The lawyer will coordinate with a cross-border accountant to file T2062 and manage the CRA remittance.
Buyers: If you are buying from a non-resident and no clearance certificate is produced at closing, you are not doing the seller a favour by ignoring the withholding requirement. The obligation is on you, and failure to withhold and remit exposes you to liability. Your real estate lawyer should confirm the seller's residency status before closing.
Frequently asked questions
Does it matter if the non-resident seller is an individual vs. a corporation?
Yes. The rules apply to non-resident individuals, corporations, and trusts. The specific forms and procedures can differ slightly. Additionally, if the seller is a corporation, the buyer needs to consider whether the shares of that corporation (rather than the real estate itself) constitute taxable Canadian property — a separate analysis.
What if the sale price is less than my cost? Do I still need a clearance certificate?
Yes. The CRA requires the clearance certificate process regardless of whether there is a gain or loss. You still file T2062 to report the disposition. If there is a loss, no tax is owing, and the certificate should issue without a remittance — but the paperwork still must be done.
Can the non-resident seller's lawyer handle the CRA filing?
A lawyer can assist with the legal aspects of the transaction, but the tax calculations and CRA remittances are typically handled by a CPA or cross-border tax professional working alongside the real estate lawyer. Treadstone Law works with trusted accounting partners to ensure both sides of the transaction are covered.
Is there a deadline to apply for the clearance certificate?
CRA must be notified within a specific number of days after the date of the disposition (as of writing — verify the current deadline with CRA). Late notification attracts penalties. Start the process before you even have a firm closing date.
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