Non-Residents Selling Canadian Real Estate (Section 116) – A Complete Guide by a Montreal CPA Firm Near You

Introduction

When a non-resident of Canada sells Canadian real estate—whether a condo, house, cottage, duplex, land, or commercial property—special tax rules apply. Unlike Canadian residents, non-residents cannot simply sell the property and report the gain at tax time. Instead, the buyer must hold back part of the sale proceeds, and the seller must obtain a Section 116 Clearance Certificate from CRA to avoid large withholdings. These rules protect CRA’s right to collect tax on gains made by non-residents. Understanding the process is essential to prevent delayed closings, frozen sale proceeds, penalties, and large unexpected tax withholding.

Legal and Regulatory Framework

Section 116 of the Income Tax Act governs the sale of “taxable Canadian property” (TCP) by non-residents. TCP includes: Canadian real estate, Canadian rental properties, land, certain shares in real-estate-rich corporations, interests in Canadian partnerships and trusts holding real estate, and rights to acquire Canadian property. When a non-resident disposes of TCP, CRA requires a withholding tax—typically 25% to 50% of the gross sale price—unless the seller obtains a Clearance Certificate (Form T2062/T2062A). Buyers are legally obligated to withhold and remit money to CRA if the seller cannot provide a certificate, or the buyer becomes personally liable.

Key Court Decisions

In Karam v. The Queen, CRA held a buyer personally liable for failing to withhold the required 25% when purchasing a property from a non-resident, reinforcing buyer responsibility. In Abrahams v. Canada, the court confirmed that even if a non-resident seller leaves Canada, CRA may reassess and pursue withholding from the buyer or their legal representatives. In Baresco Holdings v. Canada, CRA successfully denied a seller’s attempt to avoid reporting by using a corporate structure, affirming substance-over-form rules. These cases show that CRA strictly enforces Section 116 withholding.

Why Non-Resident Sales Are Closely Monitored

CRA monitors non-resident sales through: land registry databases, legal/notary transaction filings, T2062 submissions, provincial land-transfer systems, and FINTRAC identification forms. Red flags include sellers providing foreign ID, foreign address records, payments coming from or going to foreign bank accounts, property owned through offshore corporations, and Canadian real estate agents representing non-resident owners. CRA will not release sale proceeds held in trust until Section 116 requirements are satisfied.

How the Section 116 Process Works

1. Buyer’s Withholding Requirement

If the seller is a non-resident and no Clearance Certificate is provided at closing, the buyer must withhold and remit either: 25% of the gross selling price (most real estate), or 50% for certain types of property (like depreciable property). Funds are typically held by the notary or lawyer until CRA approves the release.

2. Seller Files for a Clearance Certificate (Form T2062 / T2062A)

The non-resident seller must submit: Form T2062 to report capital gains, Form T2062A if the property includes depreciable rental property, purchase and sale agreements, proof of cost base, legal fees, renovations, commissions, property tax statements, and ID. CRA reviews the application and issues a certificate indicating how much tax must be remitted.

3. CRA Issues the Clearance Certificate

If approved, CRA authorizes the release of excess withheld funds. CRA typically requires remittance equal to 25% of the estimated gain, not the total sales price.

4. Seller Files a Canadian Tax Return After the Sale

The non-resident must file a Section 116 return (T1 or T3) for the year of sale to calculate the final tax liability. If too much tax was withheld, CRA refunds the excess.

Example

Sale price: $800,000.
Cost base: $500,000.
Capital gain: $300,000.
Withholding without certificate: $200,000 (25% of $800,000).
With Clearance Certificate: $75,000 (25% of the gain).
The difference—$125,000—is released back to the seller only after CRA approvals.

Consequences of Not Following Section 116

• Buyer becomes liable for the withholding amount

• CRA can seize funds from buyer or lawyer

• CRA charges interest and penalties

• Seller cannot access sale proceeds

• Closing may be delayed or fail

• Seller may face future immigration/tax compliance issues
  Section 116 errors are costly for both parties, especially buyers unaware of their obligations.

Special Considerations

Rental Properties

Non-residents must also comply with NR4 filings and 25% withholding on rental income before the sale.

Corporations and Trusts

Non-resident corporations, partnerships, and trusts selling Canadian real estate must file corporate-level T2062 forms and tax returns.

Treaty Countries

Some countries reduce taxes through tax treaties, but withholding still applies until CRA approves otherwise.

Mackisen Strategy

At Mackisen CPA Montreal, we assist both buyers and sellers in navigating Section 116 rules. We prepare T2062/T2062A packages, calculate adjusted cost bases, compile renovation and legal documentation, coordinate with lawyers and notaries, submit Clearance Certificate requests, communicate with CRA officers, expedite releases of withheld funds, and file the required non-resident tax returns. Our expertise prevents costly delays and protects all parties from penalties.

Real Client Experience

A non-resident selling a Montreal condo was facing $180,000 in withholding; we secured a Clearance Certificate reducing withholding to $40,000. A buyer unknowingly purchasing from a non-resident risked liability; we intervened, filed compliance documents, and avoided penalties. A foreign investor selling a rental property had incomplete ACB records; we reconstructed cost base and successfully obtained a certificate. A U.S. seller received a refund after we corrected CRA’s misinterpretation of renovations and capital improvements.

Common Questions

Do non-residents pay higher tax? Not necessarily—tax rates on gains are similar, but withholding rules are strict. Can buyers be penalized? Yes—buyers are liable if they fail to withhold. How long does the Clearance Certificate take? Typically 8–16 weeks. Can withholding be avoided? No—but it can be reduced with proper filings.

Why Mackisen

With over 35 years of combined CPA experience, Mackisen CPA Montreal guides non-residents, investors, buyers, lawyers, and brokers through Canada’s strict Section 116 process. We ensure compliance, prevent penalties, and accelerate the release of sale proceeds.