When a non-resident sells real estate in Canada, the buyer is legally required to withhold 25% of the gross purchase price. To recover these funds, the non-resident seller must apply to the CRA for a Section 116 Certificate of Compliance, reducing the tax liability to 25% of the net capital gain rather than the gross price.
Owning property in Canada as a non-resident can be highly lucrative, but selling it involves strict federal tax compliance. Section 116 of the Income Tax Act exists to ensure the Canada Revenue Agency (CRA) collects capital gains tax before the funds cross international borders. Whether your property is a condo in Toronto, a ski chalet in Whistler, or a cottage in Nova Scotia, the withholding tax rules apply universally. Failure to navigate the Certificate of Compliance process properly can result in hundreds of thousands of dollars being permanently trapped by the government.
Step-by-Step Process for Non-Resident Sellers
Managing a Section 116 application requires deep coordination between your real estate agent, your Canadian real estate lawyer, and your accountant. Timing is everything, as missing statutory deadlines triggers immediate penalties.
Step 1: Listing the Property and Informing the Buyer
From the moment you list the property, you must disclose your non-resident status. When a firm offer is accepted, the buyer’s lawyer is placed under a legal obligation to protect the Canadian government. They are mandated to hold back 25% (and sometimes up to 50% for certain rental properties) of the total gross sale price in their trust account upon closing.
Step 2: Submitting Form T2062 to the CRA
No later than 10 days after the closing date, the non-resident seller must file Form T2062 (Request by a Non-Resident of Canada for a Certificate of Compliance). This complex form calculates your actual capital gain by deducting your original purchase price and capital outlays from the selling price. Filing this form late incurs a penalty of $25 CAD per day, up to a maximum of $2,500 CAD.
Step 3: Managing Rental Property Complications (Form T2062A)
If you rented the property out while you were a non-resident and claimed Capital Cost Allowance (depreciation), the rules become tougher. You must also file Form T2062A. The CRA will demand a recapture of that depreciation, which is taxed as regular income, and the buyer’s lawyer may need to withhold 50% of the building’s value until the clearance certificate is issued.
Step 4: Paying the Net Tax Request to the CRA
Once the CRA reviews your T2062 application, they will issue a letter outlining the exact amount of tax required to cover the 25% on your net capital gain. Your lawyer will take this precise amount from the funds sitting in trust and remit it directly to the CRA on your behalf.
Step 5: Receiving the Certificate and Releasing the Funds
After the CRA cashes the payment, they will formally issue the Section 116 Certificate of Compliance. Your lawyer will present this certificate to the buyer’s lawyer. At this exact moment, the buyer’s lawyer is legally cleared to release the remainder of the 25% holdback to you. You then file a standard Canadian non-resident tax return (Section 115) the following year to finalize everything and potentially claim a minor refund.
How Much Does the Process Cost?
Selling non-resident property involves substantial professional fees and massive temporary cash-flow reductions.
- Gross Withholding Amount: 25% of the total selling price held in trust (e.g., $250,000 CAD on a $1 Million sale).
- Net Capital Gains Tax: Generally 25% of the profit made on the property.
- CRA Late Filing Penalty: $2,500 CAD maximum if you miss the 10-day notification window.
- Law Firm & Accountant Fees: Preparing a Section 116 application is complex. Accounting and legal fees combined typically range from $3,000 to $6,000 CAD per transaction.
How Long Does the Process Take?
Securing a Certificate of Compliance is notoriously slow. Currently, the CRA takes an average of 90 to 120 days to process a standard T2062 application. During this entire 3 to 4-month waiting period, your 25% holdback remains locked in the lawyer’s trust account. Sellers must not rely on using those funds immediately for another purchase.
Frequently Asked Questions (FAQ)
What happens if I sell at a loss?
Even if you sell the property for less than you bought it for, the buyer must still withhold 25% of the gross sale price. You must complete the T2062 process to prove the loss to the CRA so the funds can be released.
Can the buyer choose not to withhold the 25%?
No. If the buyer’s lawyer fails to withhold the funds, the CRA can hold the buyer personally liable for the non-resident’s capital gains tax. Buyers will never waive this requirement.
Can I claim the Principal Residence Exemption as a non-resident?
Usually, no. The Principal Residence Exemption is generally only available for the years you were an active tax resident of Canada.
Do I have to file a tax return if I already got the certificate?
Yes, obtaining the Certificate of Compliance does not waive your requirement to file a Canadian non-resident income tax return by April 30 of the following year to finalize your tax position.
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