The Essential Guide to Non-Resident of Canada Certificate of Compliance

If you’re a non-resident selling Canadian property, the Canada Revenue Agency requires specific documentation to ensure tax compliance—and failing to provide it can cost you significantly. Without a Non-Resident of Canada Certificate of Compliance, buyers may withhold up to 50% of your sale proceeds until proper documentation is in place. For a million-dollar property sale, that’s potentially $500,000 held back from your proceeds.

The withholding amount depends on your property type and use. If you’re selling a personal residence that never generated income, the withholding is 25% of the sale price. However, rental or income-generating properties face higher withholding: 25% for the land value plus 50% for the building value. You must also submit Form T2062 within 10 days after selling the property to avoid daily penalties.

Starting January 1, 2025, these requirements become even more expensive. The standard withholding rate will increase from 25% to 35% for dispositions of taxable Canadian property, making early planning crucial for anyone considering a property sale.

Forbes Advisor Canada explains the certificate of compliance process, from application requirements to potential penalties, and provides strategies to minimize your tax liability when selling Canadian property as a non-resident.

Who Needs a Certificate of Compliance in Canada

The Non-Resident of Canada Certificate of Compliance, also known as a Section 116 clearance certificate, is required for specific property transactions involving non-residents. Understanding whether you need this certificate depends on your residency status and the type of property you’re selling.

Definition of a non-resident for tax purposes

The Canada Revenue Agency (CRA) considers you a non-resident for tax purposes under specific circumstances. You fall into this category if you:

• Normally, customarily, or routinely live in another country and are not considered a resident of Canada
• Do not have significant residential ties in Canada and either live outside Canada throughout the tax year or stay in Canada for less than 183 days in the tax year

“Non-resident” doesn’t just mean foreign citizens. Canadian citizens and permanent residents who have emigrated from Canada are also considered non-residents if they meet these criteria. If you’ve established residential ties in a country with which Canada has a tax treaty and you’re considered a resident of that country, you may be classified as a “deemed non-resident” of Canada.

When a certificate is required

A Certificate of Compliance becomes necessary whenever a non-resident disposes of taxable Canadian property. This legal requirement stems from Section 116 of the Income Tax Act, which mandates non-residents to notify the CRA when selling Canadian property.

Non-residents must apply for this certificate regardless of whether they’re individuals, corporations, partnerships, or trusts. The application process must be initiated within 10 days following the closing of the property sale. Failure to do so results in penalties of CAD 34.83 per day, with a minimum penalty of CAD 139.34 and a maximum of CAD 3,483.40.

For jointly owned properties, each non-resident owner must submit a separate application. For example, if a property is owned by two spouses who are both non-residents, they each need to apply for their own certificate.

The CRA may refuse to issue a Certificate of Compliance if the non-resident owner hasn’t met their obligations under the Underused Housing Tax Act (UHTA). Compliance with all Canadian tax requirements is essential before applying.

Types of properties that trigger compliance

The requirement for a Certificate of Compliance applies to various types of taxable Canadian property (TCP):

• Real or immovable property situated in Canada (residential and commercial real estate)
• Resource property situated in Canada (such as mining or oil rights)
• Timber resource property situated in Canada
• Life insurance policies in Canada
• Depreciable property that is taxable Canadian property
• Eligible capital property that is taxable Canadian property

Beyond these direct property types, compliance is also required for interests in certain entities. This includes shares of corporations not listed on a designated stock exchange, partnership interests, or trust interests where more than 50% of the fair market value derived from Canadian real property, resource property, or timber property in the previous 60 months.

Shares of listed corporations, mutual fund corporations, or mutual fund trust units require compliance if, during the previous 60-month period, 25% or more of the issued shares or units belonged to the taxpayer (or the taxpayer and related persons), and more than 50% of the fair market value was derived from Canadian real property, resource property, or timber property.

Given the complexity of these rules and the substantial penalties for non-compliance, many non-residents find professional guidance invaluable when determining their obligations.

Contact BOMCAS Canada today for all your Non-Resident of Canada Certificate of Compliance needs.

Understanding Section 116 of the Income Tax Act

Section 116 of the Income Tax Act establishes the legal framework for how Canada collects taxes from non-residents who sell Canadian property. This legislation ensures the government can collect taxes from people who don’t live in Canada but profit from Canadian real estate.

Legal basis for the clearance certificate

The purpose of Section 116 is straightforward: non-resident taxpayers must report property sales to the Canada Revenue Agency (CRA) and pay applicable Canadian income taxes. This section requires non-resident vendors to notify the Minister of National Revenue about property dispositions.

Under subsections 116(1) and 116(3), non-residents must notify the CRA either before selling their property or within 10 days after the transaction closes. The Minister will then issue a certificate of compliance (commonly called a “116 Certificate”) once the non-resident has either:

• Paid 25% of the amount by which the estimated proceeds exceed the property’s adjusted cost base, or
• Furnished security acceptable to the Minister

This certificate confirms that all tax obligations related to the property sale have been addressed. Although obtaining this document isn’t technically a legal requirement, neglecting to secure one exposes both the seller and buyer to significant financial risks.

Implications for non-resident sellers

For non-resident sellers, Section 116 creates several important obligations. Most critically, failing to notify the CRA within the prescribed 10-day window after disposition triggers a penalty of CAD 34.83 per day, with a minimum penalty of CAD 139.34 and a maximum of CAD 3,483.40. For properties held jointly, these penalties apply to each non-resident owner separately.

A Certificate of Compliance typically isn’t available before closing. The seller’s lawyer can arrange an undertaking with the buyer’s lawyer to hold back 25% or 50% of the gross purchase price until the certificate is obtained.

While awaiting the certificate, non-resident sellers can request a “Comfort Letter” from the CRA. This document confirms that the non-resident’s taxes are in good standing, allowing the seller’s lawyer to retain the withheld funds without interest or penalties. However, the CRA will not issue a Comfort Letter until the non-resident seller has submitted Form T2062.

Once the Tax Clearance Certificate is received, the withheld amount can be released to the non-resident. Obtaining this certificate typically takes 8-12 weeks or longer, which explains why starting the application process well before the closing date is crucial.

CRA’s authority and enforcement

The CRA has substantial authority in enforcing Section 116. Subsection 116(8) allows the agency to refuse issuing a certificate of compliance if the non-resident owner hasn’t met their obligations under the Underused Housing Tax Act.

From the buyer’s perspective, the CRA’s enforcement powers create significant risk. Without a certificate, subsection 116(5) makes the purchaser liable to pay and remit 25% of the purchase price as tax on behalf of the non-resident seller within 30 days after the end of the month in which the property was acquired. The purchaser can then deduct this amount from any payment to the non-resident seller.

This liability cannot be avoided except in two circumstances:

1. After reasonable inquiry, the purchaser had no reason to believe the seller was a non-resident
2. The Minister has issued a certificate under subsection 116(4)

Failure to remit the required amount to the CRA within the prescribed period may result in penalties equal to 10% or 20% of the amount that should have been remitted. There’s no limitation period for Section 116(5) liability to be assessed.

Withholding Tax Rules for Non-Residents

Non-resident property sellers face a withholding tax system designed to collect taxes upfront rather than rely on voluntary compliance after a sale. Understanding these rules helps you plan for the financial impact on your transaction.

Standard Withholding Rates (25% vs 50%)

The withholding rate depends on your property type and how you’ve used it. For typical residential properties that haven’t generated rental income, the standard rate is 25% of the gross selling price. This means on a $500,000 home sale, $125,000 would be withheld.

The rate jumps to 50% for depreciable property, which includes:

• Commercial buildings
• Rental properties (for the building portion)
• Properties that have claimed capital cost allowance

For rental real estate, the withholding often splits between land and building: 25% on the land value plus 50% on the building value. This higher rate exists because depreciable property can generate recaptured depreciation upon sale, which faces higher tax rates than capital gains.

Beyond real estate, Canada imposes a 25% withholding tax on other Canadian-source income paid to non-residents, including dividends, certain interest payments, rental income, pension payments, and royalties. Actors performing in Canada face a special 23% withholding rate on their gross earnings.

Changes Effective January 1, 2025

The 2025 changes significantly impact non-resident sellers. The standard withholding rate for taxable Canadian property dispositions increases from 25% to 35%. This 10% increase reflects the government’s effort to align withholding amounts with actual tax liability at current rates.

The changes respond to updated capital gains inclusion rates and current federal, provincial, and territorial tax rates. Non-residents selling property in Quebec face even steeper withholding, as the provincial rate increases from 12.875% to 17.167%, bringing total Quebec withholding to 52.167%.

These changes mean substantially less cash at closing. For a property selling for $696,680.10 in Quebec, total withholdings would reach $363,437.11, leaving the seller with less than half the gross proceeds until tax filing.

How Withholding Tax Is Calculated

Withholding tax calculation follows a systematic process based on property type and location:

1. Determine the property’s gross selling price
2. Apply the appropriate rate (25% or 50%, becoming 35% in 2025)
3. Calculate provincial withholding separately where applicable
4. Withhold and remit this amount to the CRA

For example, on a $800,000 residential property sale in 2024, the withholding would be $200,000 (25% of gross proceeds). In 2025, this same property would face withholding of $280,000 (35%).

Tax treaties between Canada and your home country may reduce these rates. Non-residents from treaty countries can potentially claim refunds for excess withholding tax within two years after the end of the calendar year in which the tax was withheld.

The withholding tax typically isn’t your final tax liability. When filing your Canadian tax return, you calculate your actual tax owing based on the gain (not the gross proceeds), potentially receiving a substantial refund.

How to Apply for a Certificate of Compliance

Obtaining a Non-Resident of Canada Certificate of Compliance requires following a specific process with precise timing and documentation. The application involves multiple steps that must be completed in sequence, and understanding each stage helps ensure your application proceeds smoothly.

Step 1: Determine Your Property Classification

Start by confirming your non-resident status according to CRA definitions. Next, identify whether your property is non-depreciable (like undeveloped land) or depreciable (such as rental buildings). This classification determines which form you’ll need to complete—Form T2062 for most properties or Form T2062A for depreciable properties, Canadian resource properties, or timber resource properties.

Step 2: Gather Required Documentation

Compile all necessary documents before starting your application:

• Proof of property ownership (recent title deed)
• Purchase agreement and current sale contract (signed by all parties)
• Property assessment or appraisal (current within 6 months)
• Government-issued identification
• Tax identification number or application for one
• Records of property improvements or renovations

Incomplete documentation is one of the primary reasons for processing delays, so verify all documents are authentic and current before submission.

Step 3: Complete and Submit Your Application

Fill out the appropriate form with detailed information about both the property and the transaction. Submit your completed application to the Tax Services Office nearest to your property’s location.

Timing is critical for this step. Submit your application at least 30 days before your property sale closes to give the CRA sufficient time for review. Processing typically takes 8-12 weeks, so early submission helps prevent closing delays.

Step 4: CRA Review and Payment Request

The CRA will review your documentation and calculate the required tax payment based on your property type and estimated capital gain. You’ll need to provide this payment or acceptable security before the certificate is issued.

This payment represents an advance against potential tax owing, not necessarily your final tax liability. You may receive a refund after filing your Canadian tax return if the advance exceeds your actual tax obligation.

Step 5: Receive Your Certificate

Once all requirements are satisfied, the CRA will issue Form T2068 (the Certificate of Compliance). This document confirms you’ve met your tax obligations and allows buyers to release any withheld funds.

The timeline from submission to receiving your certificate varies—typically 8-12 weeks, though it can take longer during busy periods. Keep copies of all documentation for your records, as you’ll need this information when filing your Canadian tax return.

Missing deadlines or providing incomplete information can result in significant penalties and delays. Many non-residents find professional assistance valuable for navigating these requirements efficiently.

Required Forms and Documentation

Getting your Certificate of Compliance application right starts with proper documentation. The Canada Revenue Agency requires specific forms and supporting documents to process your request and ensure compliance with Canadian tax laws.

Form T2062 and T2062A: Which One Do You Need?

The CRA provides two primary forms for non-residents disposing of Canadian property, each serving different purposes.

Form T2062 is the standard form used for most property dispositions. This “Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property” applies to all real property dispositions. When you submit this form, you’ll need to include a tax payment equal to 25% of capital gains calculated on the form.

Form T2062A serves a specific purpose—it’s required when selling depreciable property, Canadian resource property, timber resource property, or Canadian real property that’s not capital property. If your property generated rental income, you’ll likely need this form. Unlike T2062, this form requires a payment equal to the Part 1 federal tax on recaptured capital cost allowance (CCA) claimed on the property.

Both forms must be submitted with their corresponding tax payments as calculated on the forms themselves. Missing information or calculation errors can result in processing delays or rejection of your application.

Supporting Documents: What You Need to Include

Along with your completed forms, you must provide several supporting documents:

• Purchase and sales agreement for the original property purchase
• Final statement of adjustments from your original purchase
• Support demonstrating you’re currently on title (property ownership verification)
• Purchase and sales agreement for the current sale
• Summary of improvements made and amounts spent (with receipts available)

Additional documentation may be necessary for many applications:

• Opinion letters on the property’s Fair Market Value from licensed real estate agents
• Principal residence exemption worksheets and forms (if applicable)
• Capital Cost Allowance (CCA) schedules from past tax returns (for rental properties)

Adjusted cost basis calculations require careful consideration. Miscalculations or missing supporting documents can result in denial of relevant costs, potentially increasing your tax liability.

Form T1261 for New Tax Numbers

If you don’t already have a Canadian tax identification number, you must complete Form T1261: Application for a Canada Revenue Agency Individual Tax Number (ITN) for Non-Residents.

This form is necessary if you don’t already have a:

• Social Insurance Number (SIN)
• Temporary Taxation Number (TTN)
• Individual Tax Number (ITN)

Form T1261 requires certified copies of identification documents, typically a driver’s license, passport, or another document containing your name, date of birth, and photograph. The certification must be completed by a professional such as a notary, lawyer, doctor, or chartered professional accountant who verifies the document is a true copy of the original.

To successfully complete your ITN application, you must provide:

• Your full legal name
• Date of birth
• Country of residence
• Contact information
• Type of income earned from Canadian sources

Unlike other tax forms, Form T1261 cannot be submitted electronically—it must be mailed to the appropriate tax services office, often alongside your Certificate of Compliance application.

Buyer’s Responsibilities in a Non-Resident Sale

Purchasing property from a non-resident seller creates unique legal obligations that many Canadian buyers don’t fully understand. These responsibilities carry significant financial consequences if not handled properly.

How buyers can be held liable

Buyers who purchase property from non-residents face direct liability to the Canada Revenue Agency if proper withholding procedures aren’t followed. The most crucial responsibility is withholding and remitting a portion of the purchase price—typically 25% of the gross proceeds (increasing to 35% in 2025) for most properties. Failure to withhold exposes the buyer to personal liability for the entire tax amount, plus potential interest and penalties.

The CRA can hold buyers liable even years after the transaction closes. There’s no limitation period for this liability, meaning the tax authority can pursue the buyer indefinitely if taxes remain unpaid. This obligation exists regardless of what’s written in the purchase agreement or whether the buyer was aware of the seller’s non-resident status.

Importance of asking about seller’s residency

Determining the seller’s residency status becomes essential for every Canadian property transaction. Buyers should:

• Obtain a written declaration from the seller confirming their residency status
• Include a clause in the purchase agreement requiring proof of Canadian residency
• Request supporting documentation like Canadian tax returns or valid ID
• Consider requesting indemnification from the seller against potential CRA claims

Buyers can protect themselves by including a warranty in the purchase agreement stating the seller is not a non-resident of Canada for tax purposes. Even with such warranties, however, the buyer remains liable to the CRA if the warranty proves false.

Role of buyer’s lawyer in withholding funds

The buyer’s legal representative plays a critical role in managing non-resident transactions. The lawyer must:

1. Verify the seller’s residency status through appropriate documentation
2. Calculate the correct withholding amount based on property type and use
3. Prepare the necessary documentation for fund retention
4. Hold back the required percentage of the purchase price in trust
5. Either remit these funds to the CRA or coordinate with the seller’s lawyer

Buyer’s lawyers often hold 25-35% of the purchase price in trust until receiving the Certificate of Compliance. This arrangement ensures the buyer is protected from CRA liability while giving the seller time to obtain their certificate.

The lawyer may also request an “undertaking” from the seller’s lawyer, confirming they’ll hold sufficient funds in trust until the certificate is received. This mechanism creates a legal obligation for the seller’s representative to ensure tax compliance without delaying closing.

For additional protection, many lawyers recommend buyers request an extra 10-15% holdback beyond the statutory minimum, especially for high-value properties or complex transactions involving multiple non-resident sellers.

Penalties and Risks of Non-Compliance

Missing Certificate of Compliance requirements creates serious financial consequences that extend far beyond simple paperwork delays. The Canada Revenue Agency enforces these rules strictly, and the penalties can quickly escalate into thousands of dollars.

Late Filing Penalties

The CRA’s penalty structure is designed to encourage prompt compliance. Missing the 10-day notification deadline results in daily penalties of CAD 34.83 for each day the notification is late. These penalties apply whether you owe taxes on the transaction or not.

The minimum penalty is CAD 139.34, but extended delays can reach the maximum of CAD 3,483.40 per certificate. For jointly owned properties, these penalties multiply since each non-resident owner needs their own certificate.

However, relief may be available under subsection 220(3.1) of the Income Tax Act if you can demonstrate the late filing resulted from circumstances beyond your control.

CRA Holdbacks and Processing Delays

The certificate application process creates significant cash flow challenges for sellers. Certificate processing typically takes 3 to 6 months to complete, during which buyers or their lawyers hold substantial portions of your sale proceeds.

Unlike regular property sales where you receive full proceeds at closing, non-residents often wait months to access significant portions of their money. This delay can affect your ability to purchase replacement properties or meet other financial obligations.

For properties with existing mortgages, the situation becomes more complex. If your sale proceeds aren’t sufficient to cover both the mortgage payout and the required holdback, your transaction may face delays or collapse entirely.

Impact on Sale Proceeds and Closing

The financial impact can be severe, particularly for highly leveraged properties. Consider a property selling for CAD 836,016.12 with an outstanding mortgage of CAD 696,680.10. The 25% withholding (CAD 209,004.03) would create a shortfall, potentially preventing the transaction from closing.

In these situations, you face difficult choices: provide additional funds to cover the shortfall, negotiate extended closing timelines, or risk losing the sale entirely. Even in straightforward transactions, withholding requirements significantly reduce the cash you receive at closing, affecting your ability to reinvest or meet other financial commitments.

Many experienced real estate professionals recommend starting the compliance process well before listing your property to avoid these complications.

Filing Your Tax Return and Claiming Refunds

Once your property sale closes and you’ve received your Certificate of Compliance, filing a Canadian tax return becomes your next step toward recovering excess withholding tax. The good news? You’ll likely get money back, as the actual tax you owe is typically much lower than the amount withheld.

Section 216 Return for Rental Properties

If your property generated rental income, you have a valuable option under Section 216 of the Income Tax Act. This special election allows you to pay tax on your net rental income instead of the gross amount that was withheld. The difference can be substantial—instead of paying tax on the full rental income, you can claim legitimate expenses to reduce your taxable income.

You must file this Section 216 return within two years from the end of the year in which the rental income was paid. For 2024 rental income, you have until December 31, 2026, to submit this return. If you previously submitted Form NR6 (Undertaking to File), your deadline is much earlier—June 30, 2025 for the 2024 tax year.

How Your Final Tax Bill is Calculated

Your actual tax liability differs significantly from the initial withholding amount. While withholding tax is calculated on gross proceeds, your real tax obligation considers:

• Net income after allowable expenses
• Capital cost allowance (depreciation claimed)
• Tax rates based on your country of residence

For example, consider a property that generated $16,720.32 in gross rental income with $8,360.16 in expenses and $1,393.36 in capital cost allowance. Your net taxable income would be only $6,966.80. This dramatic difference explains why filing a return often results in substantial refunds.

Claiming Your Refund

To recover excess withholding tax, you have two main options:

File a Canadian income tax return specific to your income type. This approach allows you to claim all applicable deductions and credits against your Canadian income.

Submit Form NR7-R (Application for Refund of Part XIII Tax Withheld) if the withholding exceeded treaty rates. This form must be filed within two years after the end of the calendar year in which the tax was withheld.

For rental income specifically, Form T1159 serves as the dedicated return for Section 216 elections. When you file, you’ll claim the previously withheld tax on line 43700 of your return.

The refund process typically takes several months, but given the amounts involved, it’s usually worth the wait and effort required.

The Bottom Line

Selling Canadian property as a non-resident involves significant tax obligations that can’t be ignored. With withholding rates ranging from 25% to 50% currently, and increasing to 35% and beyond in 2025, the financial impact of non-compliance extends far beyond paperwork hassles.

Starting your Certificate of Compliance application early remains the most important step you can take. The 10-day post-sale deadline for Form T2062 submission creates daily penalties that quickly add up, while the 8-12 week processing time means waiting until after closing often creates unnecessary complications.

Buyers face their own risks when purchasing from non-residents. The Canada Revenue Agency holds purchasers liable for withholding taxes indefinitely, making verification of seller residency status crucial for every transaction.

Filing a final tax return after receiving your certificate often results in substantial refunds, particularly for rental properties where expenses can offset taxable income. Non-residents have up to two years to claim these refunds, but earlier filing typically means faster processing.

The certificate process may seem complex, but proper planning minimizes both stress and financial impact. Understanding your obligations beforehand allows you to focus on completing your property sale successfully while ensuring full compliance with Canadian tax requirements.

Key Takeaways

Understanding the Non-Resident Certificate of Compliance requirements is essential for avoiding costly penalties and transaction delays when selling Canadian property as a non-resident.

• Start early to avoid penalties: Apply for your Certificate of Compliance at least 30 days before closing, as processing takes 8-12 weeks and late filing triggers daily penalties of CAD 34.83.

• Withholding rates are increasing significantly: Standard withholding will jump from 25% to 35% starting January 1, 2025, with Quebec reaching 52.167% total withholding.

• Buyers face unlimited liability: Purchasers must withhold required amounts or face personal liability to CRA with no limitation period for enforcement.

• File tax returns for potential refunds: Submit Section 216 returns for rental properties or regular tax returns within two years to claim refunds of excess withholding.

• Property type determines requirements: Use Form T2062 for standard properties or T2062A for rental/depreciable properties, with different withholding rates (25% vs 50%).

The certificate process protects both sellers and buyers while ensuring tax compliance, but proper planning and professional guidance are crucial for navigating the complex requirements successfully.

FAQs

Q1. What is a Non-Resident of Canada Certificate of Compliance and why is it important? A Non-Resident of Canada Certificate of Compliance is a document issued by the Canada Revenue Agency that confirms a non-resident seller has met their tax obligations when selling Canadian property. It’s important because without it, buyers may be required to withhold up to 50% of the sale proceeds, potentially causing significant financial consequences for the seller.

Q2. How long does it typically take to obtain a Certificate of Compliance? The process of obtaining a Certificate of Compliance usually takes 8-12 weeks, but it can take longer during busy periods or if additional review is required. It’s recommended to start the application process at least 30 days before the property sale closes to avoid delays.

Q3. What are the withholding tax rates for non-residents selling Canadian property? Currently, the standard withholding rate is 25% of the gross selling price for most properties. For depreciable property like rental buildings, the rate is 50%. Starting January 1, 2025, these rates will increase to 35% and 52.167% (in Quebec) respectively.

Q4. What happens if a non-resident seller doesn’t apply for a Certificate of Compliance? Failing to apply for a Certificate of Compliance within 10 days after selling the property results in penalties of CAD 34.83 per day, with a minimum penalty of CAD 139.34 and a maximum of CAD 3,483.40. Additionally, the buyer may be held liable for the seller’s unpaid taxes.

Q5. Can non-resident sellers get a refund of the withheld taxes? Yes, non-resident sellers can potentially get a refund of excess withheld taxes by filing a Canadian tax return or submitting Form NR7-R within two years after the end of the calendar year in which the tax was withheld. The actual tax liability is often less than the initial withholding amount, especially for rental properties where expenses can be deducted.