Section 116 Clearance Certificate for Non-Resident Sellers in Ontario

The holdback that is not a deposit

When a non-resident sells a house in Ontario, section 116 of the Income Tax Act sits on the file. It is not Ontario's Non-Resident Speculation Tax. It is not the federal foreign buyers ban. Those rules hit buyers on the way in. Section 116 hits the seller on the way out. If the certificate is missing, the buyer may become liable to CRA for a specified amount of tax, and is entitled to hold that amount back from the price.

CRA's procedures circular is blunt. A non-resident who disposes of taxable Canadian property has to notify CRA before the sale, or within ten days after. A house in Ontario is real property situated in Canada. That is taxable Canadian property. Once CRA has tax or acceptable security, it issues a certificate of compliance to the vendor and a copy to the purchaser. If the purchaser does not receive that certificate, the purchaser must remit a specified amount to the Receiver General and may deduct it from the price.

A Toronto real estate lawyer asks about residency before the offer is firm. A late T2062 is how 25 or 50 percent of the purchase price sits in trust after closing, depending on the type of property.

What the certificate actually is

The certificate of compliance is CRA's confirmation that the non-resident has paid or secured the tax on that disposition. It is not a residency ruling. It is not proof the seller is a Canadian. It is a certificate for that sale.

The vendor files Form T2062 for a proposed or actual disposition of taxable Canadian property that is capital property. For depreciable property, inventory real property, and a few other buckets, the form is T2062A. Some files need both: T2062 for the capital gain on land and building, T2062A for recapture.

If the notice is for a proposed sale, CRA issues Form T2064. If it is for an actual sale, CRA issues Form T2068. A copy goes to the purchaser. That copy is what takes the purchaser off the hook for that notice.

To get the certificate on ordinary capital property, the vendor pays 25 percent of the amount by which proceeds exceed the adjusted cost base, or posts security CRA will accept. CRA's circular is explicit: selling costs such as commission are not deducted in that calculation. Those come off later on the income tax return for the year.

The vendor needs a Canadian tax number. If there is no SIN, TTN, or ITN, apply for an ITN on Form T1261 separately and ahead of the T2062. CRA will not issue the certificate without an identification number.

The purchaser's 25 percent and 50 percent

Without a certificate, the purchaser is entitled to withhold the amount they may have to remit to CRA. That amount is not a percentage of the gain. It is 25 percent or 50 percent of what the purchaser paid, depending on the type of property.

Subsection 116(5) makes the purchaser liable to remit 25 percent of the cost of the property, unless a certificate has been issued, the property is excluded, or after reasonable inquiry the purchaser had no reason to believe the vendor was a non-resident. The same subsection entitles the purchaser to withhold that amount from the price. That 25 percent applies to taxable Canadian property that is not property described in subsection 116(5.2). A typical personal-use house is in that bucket.

Subsection 116(5.3) raises it to 50 percent for property described in subsection 116(5.2). That list includes real property that is not capital property (inventory of land) and depreciable taxable Canadian property, such as a rental building on which capital cost allowance can be claimed. On a rental file, the building is usually the 50 percent piece and the land is often still capital property at 25 percent. Do not assume 25 percent of the whole price. If it is unclear which subsection applies, do not default to the lower rate. CRA's disposing-or-acquiring page puts it the same way: the purchaser may withhold 25 percent, or 50 percent on certain types of property.

On a $1 million personal-use house with no certificate, the purchaser's number is $250,000, not 25 percent of the gain. That is why the certificate matters. With a T2064 or T2068 in hand, the purchaser's remaining liability is only the amount by which the price exceeds the certificate limit.

Any amount the purchaser has to remit is due to the Receiver General within 30 days after the end of the month in which the property was acquired. Late remittance carries a penalty under subsection 227(9): 3 percent if one to three days late, 5 percent at four or five days, 7 percent at six or seven, and 10 percent after that.

Apply before closing. The ten-day rule is a backstop.

The vendor may notify CRA of a proposed disposition at any time before closing. CRA's circular tells vendors to send that notice at least 30 days before the property is disposed of, so there is time to review the file and the payment. Disposition of real property is usually the closing date, when the deed is delivered.

If the vendor did not file a proposed notice, or the actual deal does not match the proposed one, subsection 116(3) requires notice of the actual disposition no later than 10 days after. Late notification is a penalty under subsection 162(7): $25 a day, minimum $100, maximum $2,500.

Do not wait for the ten-day clock. Certificates often arrive after closing even when the T2062 went in early. Ontario files with a 30- or 60-day closing do not leave much room.

For an Ontario property, CRA currently directs the notification to the Section 116 Centre of Expertise in Ottawa. The current mailing address and the online Submit Documents path are on CRA's disposing-or-acquiring page. Use that page, not a memorized address.

What actually gets held on an Ontario closing

Subsections 116(5) and 116(5.3) entitle the purchaser to withhold the 25 or 50 percent from the price. That is a statutory right, not a courtesy. On a residential file, that is how the money is protected. The buyer's lawyer does not pay that slice to the seller on closing if the certificate is not in hand.

The usual Ontario practice is to hold the statutory amount in a lawyer's trust account until CRA issues the certificate. That is not the same as remitting it. Remittance is a payment to the Receiver General. A trust holdback is the purchaser using the right to withhold so the funds are still there if CRA later demands the tax.

If the certificate has not arrived and the 30-days-after-month-end remittance date is close, the purchaser's side has to take that clock seriously. Interest and the late-remittance penalty run from that date, not from when CRA eventually mails the T2068.

The holdback is not a deposit. The deposit already sits in the listing brokerage's trust account under the agreement of purchase and sale. Section 116 money is a tax holdback on closing funds. Mixing those two piles is how a statement of adjustments gets rewritten on closing morning.

Title insurance does not replace the holdback. A title insurance policy may ask about residency. It does not pay the purchaser's section 116 liability.

Reasonable inquiry is not a shrug

The purchaser is off the hook if, after reasonable inquiry, there was no reason to believe the vendor was a non-resident. CRA will not make that inquiry for you. It reviews each assessment on its own facts. If CRA thinks the purchaser could have known, or did not take prudent steps, the purchaser stays liable. There is no limitation period on a purchaser-liability assessment.

Ask. Get a written residency representation. The standard Ontario agreement already has the seller warranting they are not, and on completion will not be, a non-resident under the Income Tax Act. Treat a Florida address, a long absence, an estate with an executor abroad, or a "my accountant handles Canada" answer as a reason to keep asking. Do not diagnose sojourning days from a listing.

Residency for section 116 is the vendor's status at the disposition. CRA's circular says the section applies if the vendor is a non-resident, or is deemed a non-resident. It also applies if the vendor is a resident when they list, but will be a non-resident when the property is actually sold. The purchaser's own country of residence is irrelevant.

A principal residence does not skip the form

A non-resident can still designate a Canadian house as a principal residence. The exemption is limited by the number of years the taxpayer was resident in Canada after they acquired it. Years of non-residence generally do not count in the numerator. CRA still wants a T2062, or an equivalent notice. The tax or security can be reduced to match the remaining taxable gain. Attach Form T2091 or a signed calculation.

Do not tell the buyer's lawyer it was a principal residence as a reason to skip the holdback. The form still has to go in.

CRA may also refuse the certificate on a residential property if the vendor has outstanding Underused Housing Tax filings or amounts. That is a separate federal statute. It is a reason a T2062 stalls. It is not a reason to treat this page as a UHT guide.

This is not NRST and not the foreign buyers ban

Ontario's Non-Resident Speculation Tax is a tax on certain buyers of designated land. The federal prohibition on the purchase of residential property by non-Canadians is a ban on certain purchases. Both are inbound. They are covered on the foreign buyers ban page. Land transfer tax is also a buyer's tax, remitted on registration.

Section 116 is outbound. It is federal income tax collection on a non-resident's sale of taxable Canadian property. A Canadian citizen who has left Canada can still be a non-resident seller. A foreign buyer who later sells is also in this section. Do not mash the three statutes into one closing checklist line.

What the lawyer actually checks

On a sale, the lawyer reads the residency warranty in the agreement, asks the client where they live and when they left, and flags a T2062 early if the answer is not a clean Canadian resident. Sale legal fees start at $1,999 plus HST. The section 116 holdback is not a legal fee. It is a CRA amount sitting in trust or remitted to Ottawa.

On a purchase, the lawyer does not take the warranty at face value if the file smells non-resident. The closing still needs a plan for the holdback, the remittance date, and who applies for the certificate. Get that into the agreement before it is firm. Fixing it after waiver is a favour.

Frequently Asked Questions (FAQ)