What Non-Residents Need to Know Before Selling Canadian Property

Her parents lived in the condo for years. When they passed, the condo became hers. She is an American citizen who also holds Canadian citizenship, but she lives and works in the United States. The CRA treats her as a non-resident.

She listed the condo and it sold. That part went the way it usually does. What happened next is what most non-resident sellers do not see coming. Her lawyer cannot release her sale proceeds until the CRA issues a Section 116 certificate of compliance. Until that certificate arrives, a portion of her proceeds sits in trust. The typical timeline to process the certificate is four to six months. In practice it can take much longer.

She is still waiting.

That is not unusual. She knew what to expect going in. We had talked through the process before she listed. But knowing the timeline and living the timeline are two different things. The wait is real regardless of how well you plan for it.

That is the reason I put this post together. If you own property in Canada and you live outside the country, here is what you need to understand before you decide to sell.

The tax content in this post was developed with Rock Lapalme, CPA, CA, TEP, MTax, Tax Principal at WMKL Chartered Professional Accountants in St. Catharines, Ontario. Rock has presented on Section 116 compliance to hundreds of real estate lawyers in Ontario. For the tax compliance side of your sale, Rock and his team at WMKL are worth reaching out to directly.

Citizenship Is Not Residency

This is the most common misconception and it is worth saying clearly at the start. You can hold a Canadian passport and be treated as a non-resident for tax purposes. What matters to the CRA is where your life is actually based. Where you live, where you work, where your family is, where you bank, how many days you spend in Canada each year.

If you emigrated years ago, if you live and work in another country full time, if you inherited a property here but have not lived in Canada in years, you are almost certainly a non-resident for tax purposes regardless of your citizenship or permanent residency status. Confirming your residency status before selling Canadian property as a non-resident is the right first step. A cross-border tax specialist can tell you exactly where you stand.

For a real example of how this plays out in practice, see the practical side of selling Canadian property as a non-resident.

What Section 116 Actually Means for You

Section 116 is Canada’s way of making sure non-residents selling Canadian property pay their taxes before the money leaves the country.

When a Canadian resident sells, they report the gain on their tax return the following spring. The government is comfortable waiting for payment of the tax because the seller is generally still in Canada.

When a non-resident sells, that comfort is gone. So the law requires the tax to be addressed at closing, not after.

Here is what that looks like in practice. Before or at closing, you are required to notify the CRA of the sale by filing a form called the T2062. A tax payment is calculated based on the capital gain on the property and either remitted to the CRA in advance or held back from your proceeds at closing. Once the CRA is satisfied they issue a certificate of compliance.

Until that certificate arrives, your lawyer holds a portion of your proceeds in trust. For a personal residence or cottage the holdback is 25 percent of the sale price. For a rental property or any property that has been used to earn income the holdback is up to 50 percent. In Quebec, the withholding rate is even higher.

That money may still be yours if you do not actually owe that much tax. It is just not available until the certificate comes through. And the typical timeline is four to six months. In practice it can take much longer. The earlier you start the process the better your position at closing.

For a real example of a non-resident landlord working through this from outside Canada, see a non-resident landlord navigating a Canadian sale.

The Holdback Is Not Your Final Tax Bill

This surprises a lot of people. The amount held back at closing is not necessarily what you ultimately owe. It is a payment on account while the CRA works through the file.

Once you file a tax return reporting the actual gain, your real tax owing is calculated based on the applicable rates for your situation. In many cases the actual tax is less than what was held back and a refund follows. In other cases, there is additional tax owing. Miss the deadline to file the return by a long enough period of time and you may incur interest and penalties, or you may forfeit a refund.

You have three years from the end of the year of the sale to file and claim a refund. Miss that window and the refund is forfeited.

This is why a cross-border tax specialist is not optional for a non-resident sale. The filing requirements are specific, the deadlines are firm, and missing them has a real cost.

The Buyer Is Also on the Hook

Most sellers focus on their own obligations. What is less understood is that Section 116 creates direct liability for the buyer as well.

If a certificate of compliance has not been issued and the buyer cannot confirm after reasonable inquiry that the seller is a Canadian resident, the buyer can be held personally liable for the unpaid withholding tax. That liability stays even if the buyer has already paid the full purchase price to the seller.

This is why experienced real estate lawyers on both sides of a non-resident transaction take the Section 116 process seriously. It is not a formality. It is a real financial exposure for everyone involved.

Situations That Are More Complicated Than They Look

Most non-resident sellers are thinking about a straightforward sale. But there are situations that trigger Section 116 in ways that catch people off guard.

If the property has ever been rented, even years ago, it is treated differently than a personal use property. A separate certificate of compliance is required, the buyer holdback is up to 50 percent rather than 25 percent, and the filing process is more involved. Sellers who assume a former rental is the same as a personal residence sometimes find this out too late.

If you are dealing with an estate, the estate is treated as a separate taxpayer from the person who passed away. In most cases the estate acquires the property at its fair market value at the date of death, which means there may be little or no capital gain for the estate to report, but if the deceased was a non-resident then there may be a tax liability resulting from their death. The Section 116 compliance steps may still apply for a distribution of sale proceeds from the estate to beneficiaries. Assuming the process is simpler because the property came through an estate is a mistake that creates delays.

If you lived in the property as your principal residence for some or all of the years you owned it, including the years you were still living in Canada, you may be able to claim the principal residence exemption for those years. That can significantly reduce or eliminate the capital gain, but it does not apply automatically. It requires specific forms filed alongside the T2062 and the timing matters. Even still, the requirement for the purchaser to withhold may apply.

Where to Start

Start the CRA filing process as soon as you have a firm offer. Do not wait until you are close to closing. The T2062 can be filed as a notice of proposed disposition the moment the deal is firm, and filing it immediately gives the certificate process the maximum time to run. The earlier it is filed the better your position at closing.

Even before that, in advance of listing your property, locate documents that support your adjusted cost base. The original purchase price, legal fees, the cost of any improvements you made over the years. These numbers reduce your capital gain and therefore your tax owing. Sellers who cannot find these documents end up paying 25 percent of the gross sale price rather than 25 percent of the gain. On a property held for decades that difference can be significant.

The real estate side of the process follows the same path as any other sale in Ontario. What is different is the layer of tax compliance running alongside it. Having a realtor who understands what non-resident sellers are navigating and a cross-border tax specialist handling the CRA filings means you are not figuring either piece out under pressure.

If you are thinking about selling Canadian property as a non-resident and want to understand what the process looks like for your specific situation, reach out. For the tax compliance side, Rock Lapalme, CPA, CA, TEP, MTax and the team at WMKL Chartered Professional Accountants in St. Catharines, Ontario are worth contacting directly. Rock has previously written a paper and presented to hundreds of real estate lawyers on the topic of selling real estate as a non-resident of Canada, has extensive experience helping non-residents who own Canadian real estate comply with their Canadian tax obligations, and has also prepared a pamphlet that outlines the various tax issues that can apply, which I have permission to share. Rock and WMKL have not sponsored this post. I find their resources on this subject genuinely valuable.