Selling Ontario Property as a Non-Resident of Canada: Section 116 Certificates and What to Expect

Many owners buy property in Ontario and later move abroad. If you are no longer a Canadian tax resident when you sell, the sale involves additional steps, most notably the Section 116 certificate of compliance and the possibility of a holdback from the purchase price. Based on guidance published by the Canada Revenue Agency (CRA), this article outlines the general process and what to prepare.

First: Are You a Canadian Tax Resident?

Tax residency is different from immigration status. Holding permanent residence or Canadian citizenship does not by itself make someone a tax resident, and vice versa. According to the CRA's guide T4058, Non-Residents and Income Tax, determining residency requires considering all relevant facts, including residential ties to Canada and the length, purpose, intent and continuity of stays in and outside Canada.

The guide describes two kinds of ties:

• significant residential ties: a home in Canada, a spouse or common-law partner in Canada, and dependants in Canada;
• secondary residential ties: for example personal property in Canada, such as a car or furniture, and social ties such as memberships in Canadian organizations.

Residency depends on the facts, and it is advisable to confirm your status with an accountant before listing the property. The rest of this article applies to owners who are non-residents when they sell.

The Additional Steps for Non-Resident Sellers

According to T4058, real property situated in Canada is taxable Canadian property. Non-residents who dispose of, or plan to dispose of, such property follow three steps.

Step 1: Notify the CRA and request a certificate of compliance

The seller completes Form T2062, Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property, and sends it to the CRA with payment or acceptable security. The guide notes that the form can be submitted online through My Account or Represent a Client. Form T2062A applies to certain property, such as Canadian real property other than capital property and depreciable taxable Canadian property; an accountant should confirm which form applies.

Step 2: Receive the certificate

For an actual disposition, once payment or security is provided, the CRA issues Form T2068; for a proposed disposition, it issues Form T2064.

The guide states that the CRA must be notified no later than 10 days after the actual disposition; otherwise a penalty of $25 per day may apply, to a maximum of $2,500, with a minimum penalty of $100.

Step 3: File a Canadian tax return

The seller files a Canadian return to report the disposition. The guide explains that payments made to the CRA because of the disposition, other than penalties and interest, are interim payments; the final tax is settled when the return is filed, and any overpayment is refunded.

Why the Buyer May Hold Back Funds

According to paragraph 50 of the CRA's Information Circular IC72-17R6, if the seller does not comply with the notification requirement and the CRA has not issued a certificate of compliance, the purchaser may become liable to pay a specified amount of tax on the seller's behalf and is entitled to withhold that amount from the purchase price. The circular states that the purchaser's liability is 25% of the cost of the property or, where a certificate has been issued for a proposed disposition, 25% of the amount by which the cost exceeds the certificate limit. T4058 notes that a 50% rate applies to certain types of property.

Because the buyer may bear this liability, buyers and their lawyers generally pay close attention to the status of the certificate when the seller is a non-resident. If the certificate has not been issued by closing, the parties may need to agree on a holdback arrangement, which the lawyers on both sides negotiate based on the transaction.

The Principal Residence Exemption

Many owners assume that a former home can be sold tax-free. T4058 explains that if you were not a resident of Canada for the entire time you owned the property, your period of non-residence may reduce or eliminate the principal residence exemption. The guide also states that owners claiming the exemption must file a return with the required schedule and designation form, even if no tax is payable.

Whether and to what extent the exemption applies depends on residency during the ownership period and is a calculation for an accountant.

Selling From Abroad

Non-resident sellers are usually outside Canada, so signing and funds need planning. Common approaches include:

• retaining an Ontario lawyer for the sale early, and an accountant for the tax filings;
• signing documents remotely, or granting a power of attorney to someone trusted in Canada; documents signed abroad may need to be notarized and authenticated;
• confirming the account to receive the proceeds and any transfer arrangements;
• if there is a mortgage, confirming the payout and discharge with the lender in advance.

Documents to Gather

• The original purchase agreement and closing documents, to establish the cost;
• Records of significant renovations or improvements;
• Passport, PR card or other identification;
• Information on when you left Canada and where you have lived since;
• Your SIN or individual tax number and past Canadian tax filings;
• Mortgage statements and property bills.

Frequently Asked Questions

Sources

• CRA: T4058 Non-Residents and Income Tax
• CRA: IC72-17R6, Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada (Section 116)