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. 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. 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 clearance certificate is personally liable for 25% of the cost of the property, and the statute entitles the buyer to withhold that amount from what they pay you (s. 116(5)). The buyer remits it within 30 days after the end of the month the purchase closed.

The holdback runs off the price because that’s the only number the buyer can see; your cost base lives in your records. And if you’re the buyer reading this, take the liability seriously. It’s yours personally, which is why a careful buyer’s lawyer keeps funds back until a certificate shows up.

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)). Pay 25% of the amount by which the estimated proceeds exceed your cost base and the CRA issues a certificate fixing a “certificate limit” at those proceeds (s. 116(2)). The buyer’s 25% liability only bites on the part of their cost that exceeds the certificate limit, so a certificate at the full price zeroes it and nothing gets held back.

The request rides on Form T2062, the CRA’s request form for the certificate. A rental you’ve claimed depreciation on runs partly through Form T2062A instead, and the buyer-liability rate on that slice is 50% (s. 116(5.3)). Rental income itself is a separate regime (section 216 returns); this page covers the sale.

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 (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)). 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 on a C$800,000 sale with a C$500,000 adjusted 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

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 same gain lands on your US return (Treas. Reg. 1.1-1(b)). 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 is recomputed in US dollars at the exchange rates for the dates you bought and sold (IRS, foreign currency). Two dates, two rates, so the US gain differs from the Canadian one.

The credit is where sellers get burned: the foreign tax credit (IRC s. 901, claimed on Form 1116) rests on your legal and actual final Canadian liability, and IRS Pub 514 says withheld foreign tax doesn’t qualify to the extent it’s reasonably certain to be refunded (Pub 514). Most of a C$200,000 certificate-less holdback is a refund in waiting; you credit the final assessed Canadian tax.

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 principal residence exemption is a formula, and the years that count are taxation years you were resident in Canada while the home was your principal residence (s. 40(2)(b)). Once you’ve moved to the US, every extra year of ownership adds taxable gain on the Canadian side.

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.

The treaty backstops the growth from before you moved: for a non-US-citizen who left Canada owning their principal residence, the US must treat the basis as no less than the home’s fair market value when Canadian residence ended (Article XIII(6)). The pre-move run-up stays out of US reach even when s. 121 is gone.

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 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 part of worldwide income
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	None
Key forms	T2062 (plus T2062A if depreciable), non-resident T1 return	Schedule D, Form 1116

What should I do next?

Pull together the file that proves your adjusted 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 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 on the whole chain before money moves, the $249 Cross-Border Assessment maps your sale, the certificate timeline, and both returns in writing.

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