I'm a US resident selling Canadian property. What is a Section 116 clearance certificate?

Sell Canadian real estate while you live in the US and the buyer must hold back 25% of the full purchase price for the CRA, unless you get a Section 116 clearance certificate, the CRA’s confirmation that the Canadian tax on your sale is covered. Request it on Form T2062, prepay 25% of the gain instead of the whole price, and the buyer releases everything at closing. That is the route for property that is not depreciable. A building you rented out is depreciable property, s. 116(5) does not reach it, and the buyer’s rate on it is 50% of the price with no certificate that relieves them. You’ll still file a Canadian return, and the US taxes the same gain with a credit for the final Canadian tax.

Why does the buyer hold back 25% of the full sale price instead of just my gain?

Because the law makes the buyer pay your tax if you don’t, and it runs off the gross price; your cost base lives in your records and the buyer never sees it. Canada taxes a non-resident who disposes of taxable Canadian property (ITA s. 2(3)), and real or immovable property situated in Canada sits at the top of that definition (s. 248(1)). A buyer who acquires taxable Canadian property from a non-resident without a certificate is liable for 25% of the cost of property “other than depreciable property or excluded property”, and 50% on a building you rented out (s. 116(5), (5.3)).

How does the T2062 clearance certificate cut the holdback to tax on the gain?

A non-resident vendor can send the CRA notice of a proposed disposition at any time before closing, listing the buyer, the property, the estimated proceeds, and the adjusted cost base (s. 116(1)). That route is not open on property described in s. 116(5.2), so a building you rented out is not on it. Pay 25% of the estimated proceeds over your cost base and the CRA issues a certificate fixing a “certificate limit” at those proceeds (s. 116(2)). The buyer’s 25% runs on their cost and only bites above that limit, so a certificate at the full price zeroes it and nothing gets held back.

• Form T2062 is the CRA’s request form for the certificate, on the 25% route.
• A building you rented out is depreciable whether or not you claimed capital cost allowance, and runs a 50% branch on Form T2062A, covered in the next question.
• Rental income itself is a separate regime: the 25% withholding, Form NR6, and the section 216 return. This page covers the sale.

What if I rented the property out before selling?

Then the building leaves the 25% route. Depreciable property turns on the capital cost allowance you were entitled to claim rather than on whether you claimed any (s. 13(21)), and CCA is optional in Canada, so skipping it does not keep the building out. Section 116(5) reaches taxable Canadian property “other than depreciable property or excluded property”, so a converted rental runs through s. 116(5.2) and (5.3) at 50% of the price on the building, and no certificate relieves that. The land is not depreciable and stays at 25%.

What are the deadlines, and what does missing the 10-day notice cost?

If nothing was filed before closing, you must notify the CRA within 10 days after the disposition, by registered mail, only on property outside the s. 116(5.2) class (s. 116(3)). Miss that window and the penalty is the greater of $100 and $25 per day, up to 100 days, so it caps at $2,500 (s. 162(7)). On that route the certificate can still issue after closing once the tax is paid or secured (s. 116(4)), but a late start costs float: 25% of the price sits out of reach until the paperwork catches up.

The three paths tie up very different amounts on a C$800,000 sale, C$500,000 cost base.

	No notice filed	T2062 filed, certificate at closing	Notice within 10 days after closing
Cash tied up	C$200,000 (25% of the price), remitted to the CRA	C$75,000, prepaid with the T2062; nothing held at closing	C$200,000 held by the buyer, then C$75,000 once the certificate issues
Penalty exposure	Up to $2,500 under s. 162(7)	None	None if the notice lands inside 10 days
When you’re made whole	After your Canadian return is assessed and the refund issues	Full price at closing; any excess refunds after assessment	When the certificate issues, then the balance after assessment
If the building is depreciable	50% of the price on the building under s. 116(5.3), and a 116(5.2) certificate reduces that base without relieving the buyer	Not available: s. 116(1) excludes s. 116(5.2) property, so there is no T2062 route	Not available: s. 116(3) excludes it too, so there is no 10-day route

Do I still file a Canadian tax return after the sale?

Yes. A non-resident who disposes of taxable Canadian property has to file a Canadian return for that year (s. 150(1.1)(b)(iii)). The certificate money was only a payment on account; the return computes the real tax. Half the capital gain is taxable (s. 38(a)), and whatever you prepaid credits against the result. If the prepayment was bigger than the tax, and without a certificate it usually is, the difference refunds. Skip the return and you abandon the refund.

How does the US tax the same sale?

The US taxes its residents on worldwide income, so the gain lands on your US return (Treas. Reg. 1.1-1(b)), though in the arrival year that runs only from the residency starting date. The treaty lets Canada tax the real property gain (Article XIII(1)) and requires the US to credit the Canadian income tax (Article XXIV(1)). Everything converts to US dollars at each date’s rate (IRS, foreign currency), so the US gain differs from the Canadian one. The credit tracks your final Canadian liability (IRC s. 901); Pub 514 bars the gross holdback to the extent it’s coming back as a refund.

What if the property was my old home in Canada?

Both countries offer principal-residence relief, and both tests tend to fail a cross-border seller. Canada’s exemption is a formula whose counting years are the taxation years you were resident in Canada while the home was your principal residence (s. 40(2)(b)), so every year of ownership after the move adds taxable gain. Section 121 excludes up to $250,000 of gain ($500,000 on a joint return) if you owned and used the home as your principal residence for 2 of the 5 years before the sale (IRC s. 121; IRS Topic 701). Sell more than 3 years after moving out and the use test generally fails.

This sale is also the other half of your move-year file: Canadian real estate is excluded from the departure tax, the bill comes when you sell. If you worked through the deemed-disposition forms from the year you left, the house wasn’t in that math: real property situated in Canada is carved out of the deemed sale (s. 128.1(4)(b)); Section 116 is the trade-off. The full both-sides tax picture, the shrinking principal residence exemption in Canada and the US section 121 exclusion and departure-date basis floor, is in what you owe on each side when you sell a Canadian home after moving.

The same sale, seen from each side:

Point of comparison	Canada (non-resident vendor)	United States (resident seller)
What’s taxed	The gain on the Canadian property	The same gain, as worldwide income from the residency starting date
Currency	Canadian dollars	US dollars at the spot rates for purchase and sale
Principal-residence relief	Formula counts only years resident in Canada	s. 121: up to $250,000 ($500,000 joint) on a 2-of-5 test
Withholding on the sale	25% of the price without a certificate, and 50% on a building you rented out, where no certificate relieves the buyer	None
Key forms	T2062, or T2062A where the property is depreciable, plus a non-resident T1 return	Schedule D, Form 1116

What should I do next?

Pull together the file that proves your cost base: purchase statement, capital improvements, exchange rates for your dates. That folder drives the certificate math and the US gain. Get the T2062 moving (T2062A if you rented it out) before the closing date is locked; an early notice beats a 10-day scramble by registered mail. And plan the two returns as one exercise, since the Form 1116 credit depends on the final Canadian number.

If you’d like a second set of eyes before money moves, the $249 Cross-Border Assessment maps your sale, the certificate timeline, and both returns in writing.

• Buying from a non-resident seller instead, where the withholding duty falls on the purchaser

• How the principal residence exemption erodes while you are abroad, because every non-resident year enlarges the denominator

Selling in the other direction, US property as a Canadian resident, runs a mirror regime with two differences that change the strategy: the US withholds on the gross sale price rather than computing a payment on the gain, and there’s no 10-day cure after closing. What the date of transfer governs is the buyer’s remittance: a Form 8288-B filed on or before that date lets the buyer hold the money until the IRS decides, and a certificate applied for later still issues, but by then the cash has gone to the IRS and the certificate supports a refund rather than a smaller holdback. That side is covered in getting back the US withholding on a property sale.

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