I'm buying a house in Canada and the seller might be a non-resident. Am I liable for their tax?

Yes, and the number is bigger than the seller’s own remittance. Buy taxable Canadian property from a non-resident and ITA 116(5) makes you liable for 25 percent of what you paid rather than 25 percent of the seller’s gain, unless one of three relieving limbs applies. On 116(5.2) property, which takes in a rented building and inventory real property, ITA 116(5.3) charges 50 percent, with no certificate to reach for, and on inventory that 50 percent is a floor. Miss the remittance by more than seven days and a 10 percent penalty rides on top, plus interest, and the Minister can assess at any time. This is the buyer’s side; the seller’s certificate is the other half.

How can the buyer end up owing the seller’s tax?

Because the statute runs on your cost instead of the seller’s gain. ITA 116(5) makes a purchaser who acquires taxable Canadian property from a non-resident liable for “25% of the amount, if any, by which (c) the cost to the purchaser of the property so acquired” exceeds any certificate limit, remittable “within 30 days after the end of the month in which the purchaser acquired the property” (ITA 116(5)). Real or immovable property situated in Canada is taxable Canadian property, with no residential carve-out and no dollar threshold (ITA 248(1)).

A seller who gets a 116(4) certificate does relieve you, because that certificate is limb (b). A seller who ignores section 116 hands you no defence, because nothing in 116(5) makes their default your excuse. There is a case in between that catches people: a seller who sends the 116(3) notice on time but neither pays nor posts security gets no certificate, because 116(4) issues one only on payment or acceptable security, so limb (b) never arrives and you are liable in full (ITA 116(4)). The 10-day registered-mail notice is the seller’s, and so is the penalty for missing it, the greater of $100 and $25 per day up to $2,500 (ITA 116(3); ITA 162(7)). You do get a statutory right to recover what you paid from the seller, in 116(5) for the 25 percent and in 116(5.3)(a) for the 50 percent (ITA 116(5) and 116(5.3)), worth as much as the seller is findable.

One more base rule catches family deals. Where a non-resident disposes of taxable Canadian property by way of gift, or to a person with whom the non-resident was not dealing at arm’s length for no proceeds or for proceeds below fair market value, ITA 116(5.1)(e) directs that the reference in 116(5) to “the cost to the purchaser of the property so acquired” be read as “the fair market value of the property at the time it was so acquired”, and paragraph (f) does the same to the 116(5.3) base (ITA 116(5.1)). Related persons are deemed not to deal at arm’s length, and a child is related by blood relationship (ITA 251(1)(a), 251(2)(a) and 251(6)(a)). So a buyer who pays a non-resident parent C$500,000 for a house worth C$800,000 is charged on the C$800,000 value rather than on the C$500,000 that changed hands, and the CRA states the same substitution on the vendor’s side (IC72-17R6, paragraph 20).

What actually protects me as the buyer?

Three limbs in ITA 116(5), and a 116(2) certificate is not one of them. The subsection lifts it where (a) “after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada”, (a.1) subsection (5.01) applies, the treaty route, or (b) “a certificate under subsection 116(4) has been issued to the purchaser by the Minister in respect of the property” (ITA 116(5)). That list is for 116(5). On 116(5.2) property, a rented building or real property held as inventory, ITA 116(5.3) charges 50 percent with no certificate limb, and on inventory 50 percent is a floor.

So unless the property falls in the 116(5.2) class described below, ask for the 116(4) one by name, and ask which subsection issued it either way, because the form number will not tell you. CRA issues Form T2064 for a proposed disposition and Form T2068 for an actual one, and the same two forms serve the 116(2) and 116(4) route and the separate 116(5.2) route (IC72-17R6, paragraphs 47 and 48). A pre-closing 116(2) certificate is still worth having, because a limit set at the full price leaves nothing for the 25 percent to bite on, but that is arithmetic instead of relief. Three more things for the closing checklist:

• Issuance is not guaranteed: the Minister “may decline to issue the certificate” under 116(2), (4) or (5.2) where Underused Housing Tax returns or amounts are outstanding on residential property (ITA 116(8)).
• The treaty route at 116(5.01) asks more of you, and on a Canadian house it is closed. Limb (a) is something the purchaser “concludes after reasonable inquiry”, a positive finding rather than the absence of a reason to believe. Limb (b) is not a conclusion at all: the property must actually be one whose gain would, because of the treaty, be exempt from tax under Part I (ITA 116(5.01); ITA 248(1)). Article XIII(1) of the Canada-United States convention says gains “from the alienation of real property situated in the other Contracting State may be taxed in that other State”, and paragraph 3 of that Article, as the 1983 First Protocol replaced it in Schedule II to the Canada-United States Tax Convention Act, 1984, defines real property situated in Canada to include at 3(b)(i) “Real property referred to in Article VI (Income from Real Property) situated in Canada” (Canada-United States Tax Convention Act, 1984). CRA says the same thing generally: “Most tax treaties allow Canada to tax the income or gains only on Canadian real and resources properties and on shares of companies that derive most of their value from such properties” (CRA, Disposing of or acquiring certain Canadian property). So where the seller is a US resident a Canadian house is not treaty-protected, and Form T2062C, the 116(5.02) notice, does nothing for you. That chain is proved on the Canada-United States convention alone; for a seller resident anywhere else the CRA’s “Most” points the same way without reading that country’s treaty for you. Where the route does apply, the notice is due within “30 days after the date of the acquisition” (ITA 116(5.02)), and the CRA says it “will generally not” assess a purchaser who filed one, is unrelated to the vendor and “has made every reasonable effort to determine that the property qualifies as treaty-protected”, a posture rather than an exemption (CRA, Disposing of or acquiring certain Canadian property).
• The T2062C rule has a related-party half that buyer-side explainers drop. Treaty-protected property is excluded property only once it is treaty-exempt property, and 116(6.1) makes that conditional: “where the purchaser and the non-resident person are related at that time, the purchaser provides notice under subsection (5.02)” (ITA 116(6.1)). CRA states the consequence: “If Form T2062C is not submitted by a purchaser who is related to the vendor, a treaty-protected property will not be considered an excluded property and the regular purchaser’s liability and vendor notification requirements will apply”, and a late notification is not accepted (IC72-17R6, paragraphs 52 and 28). On a house sold by a US-resident seller this is moot, because the property is not treaty-protected in the first place; it bites where a related non-resident sells you something that is.

What counts as reasonable inquiry?

Nineteen words, and the Act adds nothing to them: “after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada” (ITA 116(5)(a)). Both halves have to hold, an inquiry that was reasonable and, after it, no reason to believe, so doing nothing fails at the first. It’s a double negative too: you needn’t prove the seller was resident in Canada, only that nothing you turned up said otherwise.

An information circular is CRA’s administrative position and binds neither the CRA nor a court, and the two texts differ: the statute asks whether you had reason to believe, while the circular asks whether you “could have or should have known”, which reaches further. No source located says a vendor’s statutory declaration of residency satisfies the test, so treat one as evidence that you inquired instead of a safe harbour. And nothing in the statute makes the seller’s misrepresentation a defence.

Why does a rental building, or a builder’s unsold house, run at 50 percent?

Two routes, and only one is about depreciation. A rented building is depreciable property, which ITA 116(5) excludes, so 116(5.3)(a) charges 50% of “the amount payable by the taxpayer for the property so acquired” net of any 116(5.2) certificate amount (ITA 116(5.3)). A builder’s unsold house is not depreciable. A second limb catches it, “a property (other than capital property) that is real property, or an immovable, situated in Canada” (ITA 116(5.2)), which takes the whole property, land included. That limb shuts the certificate route; whether it also shuts the 25 percent is open, so 50 percent is a floor.

Read as a class, 116(5.2) covers property other than excluded property that is a life insurance policy in Canada, a Canadian resource property, real property in Canada that is not capital property, a timber resource property, or “depreciable property that is a taxable Canadian property” (ITA 116(5.2)). Two of those reach a house: the depreciable-property limb, which is the rented building, and real property that is not capital property. The second one is real property the seller held as inventory rather than as an investment, which is what a builder, a developer or someone trading houses holds, and the CRA runs the same income-account-against-capital-account distinction when it decides whether a vendor’s land is inventory (IC72-17R6, paragraph 36). Buy from that seller and there is no land-and-building split to make: the whole price is 116(5.2) property and the whole price runs at 50 percent under 116(5.3). Whether ITA 116(5)‘s 25 percent runs on that same whole price as well is an open question, taken up below, so 50 percent is the floor there rather than the ceiling. CRA does operate a discretionary exemption policy for vendors in that business, but it ends in a certificate of compliance, which lands you back in the same place, reducing the base and relieving nothing.

Where the seller did hold the property as capital property, one house carries both rates. The land is not depreciable, because the depreciation classes in Schedule II to the Income Tax Regulations “shall be deemed not to include the land upon which a property described therein was constructed or is situated” (Income Tax Regulations, section 1102(2)), and depreciable property is property on which a capital cost allowance deduction is allowed (ITA 13(21)). So the land sits at 25 percent under 116(5) and the rented building at 50 percent under 116(5.3).

	ITA 116(5)	ITA 116(5.3)
Applies to	taxable Canadian property other than depreciable property or excluded property, so a home the seller did not rent out, and, where the seller held the property as capital property, the land under a rented building; this subsection does not stand aside for 116(5.2) property the way 116(1) and 116(3) do, so whether it also reaches real property the seller held as inventory, on the whole price, is a question this page does not answer	the property listed in 116(5.2), which is property other than excluded property that is depreciable taxable Canadian property such as a rented building, real property in Canada that is not capital property, which is real property held as inventory and which takes the land with it, resource and timber property, or a life insurance policy in Canada
Rate, and the base it runs on	25% of “the cost to the purchaser of the property so acquired”, so the gross price for that property, before any deduction for the seller’s own cost, and never 25% of the seller’s gain, which is the vendor’s own base under 116(2) and 116(4)	50% of “the amount payable by the taxpayer for the property so acquired”, a gross amount too, and unrelated to the seller’s gain
Relieving limbs	reasonable inquiry under (a), subsection (5.01) under (a.1), or a 116(4) certificate under (b)	reasonable inquiry, or subsection (5.01), and that is the full list, because 116(5.3)(a) contains no certificate limb, so no certificate lifts this liability
Certificate that shrinks the base	the “certificate limit” fixed by a 116(2) certificate, which reduces the base under paragraph (d) while relieving nothing	the amount fixed in a 116(5.2) certificate, which reduces the base under (a)(ii) while relieving nothing
Can a 116(2) or 116(4) certificate be issued at all?	yes, on a 116(1) or 116(3) notice, which is why limb (b) is reachable here	no, because 116(1) and 116(3) both exclude property described in 116(5.2), so the vendor’s only route is a 116(5.2) certificate
Remittance deadline	within 30 days after the end of the month of acquisition, under 116(5)	within 30 days after the end of the month of acquisition, under 116(5.3)(b)

Three gaps there are the buyer’s problem. The Act gives no allocation rule between land and building, so the number driving your 50 percent exposure is a matter of judgment. Whether the property is in the 116(5.2) class at all turns on the seller’s own use and accounting, depreciable in one limb and held on income rather than capital account in the other, and both sit in records you don’t get to see. And the two exclusion lists do not match. ITA 116(1) and 116(3) stand aside for “property described in subsection (5.2)”, while 116(5) stands aside only for “depreciable property or excluded property”, and 116(6)(a.1) keeps “real or immovable property situated in Canada” out of the excluded-property paragraph that would otherwise cover a business inventory (ITA 116(5) and 116(6)). Whether that leaves the 25 percent running alongside the 50 percent on an inventory property is a question this page does not answer, so treat 50 percent as the floor there rather than the ceiling. Note also that 116(5.2) carries no percentage of its own; the 50 percent lives in 116(5.3)(a).

What if the remittance was already missed?

The penalty runs 3 to 10 percent, and the assessment has no deadline. ITA 227(9) reaches “an amount of tax that the person is, by section 116 … required to pay” and sets it at “10% of that amount” once “that amount is not paid or remitted on or before the seventh day after it was due”, rising to 20 percent for a knowing or grossly negligent repeat failure in the same year (ITA 227(9)). One closing can produce two remittances in the same calendar year, on the land and on the building, so the repeat limb is not out of reach here; it still needs a knowing or grossly negligent failure.

• The 10 percent is the top of a ladder, so a shorter delay is not free. ITA 227(9)(a) charges 3% where the Receiver General receives the amount on time but “that amount is not paid in the manner required”, and, where the Receiver General receives it late, 3% at “no more than three days after it was due”, 5% at “more than three days and no more than five days”, and 7% at “more than five days and no more than seven days”, before the 10 percent tier quoted above (ITA 227(9)). Remit four days late and the charge is 5 percent rather than nothing.
• Interest runs at the prescribed rate “from the day on or before which the amount was required to be paid to the day of payment” (ITA 227(9.3)). The prescribed rate is set by regulation (ITA 248(1)), and no number appears here.
• “The Minister may at any time assess … any amount payable under section 116” (ITA 227(10.1)(a)). The CRA puts it the same way: “Purchaser liability assessments are not subject to any time restrictions” (IC72-17R6, paragraph 50).
• Penalty and interest can be waived or cancelled at the Minister’s discretion under ITA 220(3.1), but only “on or before the day that is ten calendar years after the end of a taxation year” of the taxpayer, or on the taxpayer’s application on or before that day (ITA 220(3.1)). That is a shorter window than the assessment power in the bullet above, so on an old assessment the relief door can be shut while the assessment door is still open. The tax itself sits outside the power either way, and the CRA frames the relief as reaching penalty or interest that “resulted from circumstances beyond the control of the purchaser” (IC72-17R6, paragraph 57).

What does the whole exposure look like on one closing?

Round numbers, and every figure is an assumption. The arithmetic exists to show the gap between what a standard 25 percent holdback covers and what these two subsections can assess: on a C$900,000 duplex a standard 25 percent holdback is C$225,000 and the two liabilities come to C$375,000. That gap is where buyers get hurt.

What should I do next?

Get the seller’s residence status in writing from their lawyer before closing, and treat an unclear answer as a non-resident answer. Ask which certificate is coming and which subsection issues it: a 116(2) one, which only credits you against the base, a 116(4) one, which relieves you, or, on 116(5.2) property, a rented building or inventory real property, a 116(5.2) one, which reduces the base and relieves nothing. Then size the holdback off the land and building split where the seller held the property as capital property, or off the whole price, with 50 percent as a floor, where they held it as inventory.

The seller across the table is working the other half: the Section 116 clearance certificate from the vendor’s side covers the T2062 application. Buying in the other direction, as a Canadian buying US property, is a separate regime with its own duties on the buyer: the Canadian buying US property guide. If you already own property across the border, sell or keep US property when you move back to Canada takes up that decision.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.