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

Sell Canadian real estate as a US resident and the buyer must hold back 25% of the full price unless you get a Section 116 clearance certificate. File T2062, prepay 25% of the gain, and the buyer releases the rest at closing. A rented building is depreciable, so the holdback is 50% of the price net of a s. 116(5.2) certificate; file T2062A instead. The Minister may decline either certificate while Underused Housing Tax returns or amounts are outstanding (s. 116(8)). You still file a Canadian return, and the US credits the final Canadian tax.

Why does the buyer hold back 25%?

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 cut the holdback?

A non-resident vendor can notify the CRA of a proposed disposition before closing, listing the buyer, the property, the proceeds and the adjusted cost base (s. 116(1)). That route is closed to s. 116(5.2) property, so a rented-out building is out. Pay 25% of estimated proceeds over your cost base and the CRA issues a certificate fixing a “certificate limit” at those proceeds (s. 116(2)), though it may decline on residential property with Underused Housing Tax returns or amounts outstanding (s. 116(8)). The buyer’s 25% of cost bites only above that limit, so a full-price limit zeroes it.

• 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.
• Issuance is not automatic. On residential property, as the Underused Housing Tax Act defines it, the Minister may decline to issue the certificate under s. 116(2), (4) or (5.2) where your returns or amounts under that Act are outstanding (s. 116(8)).
• Rental income itself is a separate regime with its own withholding: the section 216 route for a Canadian rental. This page covers the sale.

Is a clearance certificate the same as compliance?

Same document, different name. The CRA calls it a “clearance certificate,” the term on Form T2062. “Certificate of compliance” is the real estate bar’s phrase, common in BC and Ontario closing checklists. Both refer to the CRA’s confirmation under ITA 116(4) that the non-resident vendor’s Canadian tax on the disposition is covered, releasing the buyer from the 25% statutory holdback.

• In a cross-border transaction with a US-resident seller, the buyer’s lawyer will usually call it a certificate of compliance and the accountant will call it a clearance certificate. They are waiting on the same piece of paper.

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, net of the amount fixed in a s. 116(5.2) certificate, which is what the T2062A gets you. The land is not depreciable and stays at 25%.

What are the deadlines and penalties?

If nothing was filed before closing, you must notify the CRA within 10 days after the disposition, by registered mail, only on property outside s. 116(5.2) (s. 116(3)). Miss it and the penalty is the greater of $100 and $25 a day to a 100-day cap of $2,500 (s. 162(7)). On that route the certificate can still issue after closing once tax is paid or secured (s. 116(4)), unless the Minister declines on residential property with Underused Housing Tax returns or amounts outstanding (s. 116(8)).

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 with no certificate applied for there is nothing to net that base down	Not available: s. 116(1) excludes s. 116(5.2) property, so there is no T2062 route; the T2062A and its 116(5.2) certificate are the separate lane, and that certificate nets the base down rather than relieving the buyer	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 citizens and residents on worldwide income, so the gain lands on your US return (Treas. Reg. 1.1-1(b)); a non-citizen’s first US year 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 and it 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 ($500,000 on a joint return) if you owned and used it 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; for a non-citizen, 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, net of the amount fixed in a 116(5.2) certificate, which nets the base down rather than relieving 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 $250 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

• Form 8288: FIRPTA withholding when selling US real property, the American-side equivalent for US property sales

• US citizen buying Canadian property, the purchase-to-sale tax sequence for Americans buying in Canada

• 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 by the seller on or before that date, with notice of it given to the buyer before the transfer, 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.