Selling as a Non-Resident: The Section 116 Clearance Certificate

If you are a non-resident of Canada for tax purposes and sell a home or rental in BC, section 116 of the Income Tax Act adds steps to your sale, and part of the price can be held back until the Canada Revenue Agency (CRA) issues a certificate. Here is who it applies to, what to file and when, how much can be held back, and how to plan ahead.

The short version

Residency, not citizenship

Section 116 depends on whether you are a resident of Canada for tax purposes, which is always a question of fact. Your citizenship doesn't decide it: a Canadian passport is only a secondary tie, and CRA says it would be unusual for a single secondary tie to be enough on its own.

• Significant ties. A home in Canada, a spouse or common-law partner here, or dependants here.
• Secondary ties. These include personal property and social ties in Canada, Canadian bank accounts, a Canadian driver's licence and provincial health coverage.
• Days in Canada. Without significant ties, you are generally a non-resident if you lived outside Canada all year or stayed here less than 183 days. Stay 183 days or more and you can be deemed a resident.

So a Canadian citizen who has moved abroad can be a non-resident, while someone who isn't a citizen but has made their home here can be a resident. If another country also treats you as a resident, a tax treaty can make you a non-resident of Canada. If you are unsure, ask for CRA's opinion on Form NR73. What counts is your status when the sale completes: if you were a resident when you accepted the offer but a non-resident on the completion date, section 116 applies.

What section 116 requires

Real estate in Canada is taxable Canadian property. When a non-resident sells it:

• Notify CRA. Send Form T2062 before the sale, or no later than 10 days after it. CRA suggests sending notice of a proposed sale at least 30 days before completion. Late notice brings a penalty of $25 a day, with a minimum of $100 and a maximum of $2,500.
• Use Form T2062A for some property. That includes a rental building and real estate held for resale rather than as capital property.
• Pay or give security. For most property, the payment is 25% of the amount by which the sale price exceeds your adjusted cost base, which is generally what you paid plus purchase costs and improvements. Selling costs such as commission aren't deducted in this calculation. CRA can accept security instead, as an interim arrangement.
• Get the certificate. CRA issues Form T2064 for a proposed sale or Form T2068 for a completed one, with copies to you and the buyer. CRA calls it a certificate of compliance. It isn't the clearance certificate an executor gets before distributing an estate.

Each co-owner files a separate request for their own share, online through CRA's My Account or Represent a Client, or by mail or fax. You need a Canadian tax number: your social insurance number, or an individual tax number, which you apply for separately and in advance on Form T1261.

Why the buyer's lawyer holds back money

If no certificate is issued, the buyer can become liable for tax on your behalf: 25% of the price, or 50% for depreciable property and real estate held for resale, due to CRA within 30 days after the end of the month the sale completed. The buyer is protected only if, after reasonable inquiry, they had no reason to believe you were a non-resident, and CRA's assessments of buyers have no time limit. So expect the buyer's lawyer or notary to ask about your residency and to hold back part of the price.

• How much. 25% of the price for most homes. On a rental, 50% applies to the part of the price that is for the building, and in practice the buyer's lawyer or notary may hold back half the whole price.
• Getting it released. The holdback is paid to you once you deliver the certificate. If it hasn't arrived by the buyer's deadline, the buyer can be required to send the money to CRA instead.
• A certificate before completion. A T2064 sets a limit equal to the price you estimated in your notice, and the buyer's liability applies only above it, so there may be nothing to hold back.
• It isn't your final tax. Payments you or the buyer make to CRA are interim. Your tax is settled on your Canadian return, and any overpayment is refunded.

With example figures: you sell a condo for $800,000 that cost you $500,000, and none of the gain is covered by the principal residence exemption. The payment for the certificate is 25% of $300,000, or $75,000. Without a certificate, the holdback would be 25% of the price, or $200,000, and on a rental it could be as much as $400,000.

How long a certificate takes

CRA doesn't publish a processing time for these certificates. It issues one at the earliest possible date once it has validated your information and received your payment or security, and missing documents will delay it. If CRA decides it needs a detailed appraisal, that can take months, though it tries to set an interim value so you can pay and move ahead. To keep things moving:

• Apply as soon as you have an accepted offer, ideally at least 30 days before completion.
• Include every document on the form's supporting document list, with support for your cost and sale price.
• Quote your tax number on every payment and letter, since a misallocated payment can cause delays.
• If you aren't a Canadian citizen or permanent resident, file any federal Underused Housing Tax returns due for the property and pay any tax owing, or CRA can refuse the certificate.
• If the buyer changes or the price ends up higher, send a revised notice.

If it was once your home

If you lived in the home while you were a resident of Canada, the principal residence exemption can still shelter part of the gain, but only for the years you were resident. For sales after October 2, 2016, the extra "plus one" year in the formula applies only if you were resident in the year you bought the home. You can ask CRA to reduce the payment for the certificate by including your calculation with the T2062, and you must file a Canadian return for the year of the sale to claim the exemption.

If the home became a rental when you moved away, that change in use can have its own tax result, so ask an accountant who works with non-residents which years are sheltered.

Selling a rental property

• Two forms. A rental building needs Form T2062A as well as T2062, even if you never claimed capital cost allowance, the tax depreciation on the building.
• A bigger payment. The payment covers 25% of the gain plus federal tax on any recapture of capital cost allowance. If the recapture can't be worked out, CRA assumes you claimed the full allowance from the time you bought.
• Rent while you own it. For a non-resident landlord, the tenant or agent generally must withhold 25% non-resident tax on the gross rent. You can elect under section 216 to file a Canadian return and pay tax on your net rental income instead, and any excess is refunded.

If tenants live there, read Selling a Tenanted Home in BC for notices and showings.

Planning your sale from abroad

• Check your timing. If you are about to move abroad, a sale that completes while you are still a resident isn't subject to section 116.
• Get ready early. Apply for an individual tax number before you list if you need one, and gather your purchase, renovation and rental records.
• Tell your team. Let me and your lawyer or notary know early that you are a non-resident, so the holdback can be planned for from the start.
• Plan your cash. If you are buying elsewhere, count on receiving only part of your proceeds at completion.
• File your return. As an individual, file a Canadian return by April 30 of the year after the sale, with a copy of the certificate, and ask a tax professional where you live how the sale is treated there.

Questions sellers often ask me

Does section 116 apply to a Canadian citizen living abroad?

Yes, if you are a non-resident for tax purposes when the sale completes. Residency depends on your ties to Canada and your days here, not on your passport.

How much will the buyer's lawyer hold back?

Usually 25% of the price, until you deliver the certificate. On a rental, 50% applies to the building's share of the price, and the holdback may be half the whole price. If CRA issues a certificate before completion, there may be no holdback at all.

When do I have to tell CRA about the sale?

Before the sale, or no later than 10 days after it completes. CRA suggests notice of a proposed sale at least 30 days ahead, and late notice costs $25 a day, from $100 up to $2,500.

How long does a clearance certificate take?

CRA doesn't publish a processing time. It generally issues the certificate once it has your information and payment or security, so a complete application sent early is the best way to avoid delays.

Do I still have to file a Canadian tax return?

Usually, yes. An individual files for the year of the sale by April 30 of the next year, and amounts already paid count toward the tax. You must file if you claim the principal residence exemption.

Selling from abroad? Read the BC selling process from listing to completion and What It Costs to Sell a Home in BC, or request a free home evaluation.

This article is general information, not legal or tax advice. The rules come from section 116 of the Income Tax Act and CRA's guidance and were current at the time of writing. For CRA's guide, see disposing of or acquiring certain Canadian property.