Section 116 Clearance Certificate

Canada taxes non-residents on gains from selling taxable Canadian property, but once the sale proceeds leave the country the CRA has little ability to collect. Section 116 of the Income Tax Act solves that problem in two ways: it makes the seller report the sale and prepay tax, and it makes the buyer the backstop if the seller does not.

The seller reports on Form T2062, Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property. It can be filed before closing, describing the proposed sale and estimated proceeds, or after closing. If no advance notice was filed, it is due no later than 10 days after the sale. Once the seller pays 25% of the expected gain (proceeds minus adjusted cost base) or posts security the CRA accepts, the CRA issues the certificate to both the seller and the buyer. A seller who misses the 10-day deadline faces a penalty of $25 per day, with a minimum of $100 and a maximum of $2,500.

Two kinds of certificate matter. A certificate for a proposed sale, under subsection 116(2), fixes a certificate limit equal to the estimated proceeds in the seller's notice, and protects the buyer up to that amount. A certificate issued after the sale, under subsection 116(4), clears the buyer completely for that property.

Section 116 applies only to taxable Canadian property, defined in subsection 248(1) of the Act. Real property in Canada is always caught. For a business sale, the key category is shares:

• Private company shares are taxable Canadian property if, at any time in the 60 months before the sale, more than 50% of their fair market value came directly or indirectly from real or immovable property in Canada, Canadian resource property, timber resource property, or options and interests in those properties.
• Partnership and trust interests are tested the same way.
• Publicly listed shares are generally excluded property under subsection 116(6), so section 116 is aimed at private companies.

An operating company whose value lies in goodwill, equipment and receivables often fails the test, so its shares are not taxable Canadian property and section 116 does not apply. A company that owns its plant or warehouse can easily pass it, and the 60-month look-back can still catch a company that sold its building two years ago. The answer needs values, not assumptions.

Residence is the other trigger, and it is decided under Canadian tax rules, not citizenship. A Canadian citizen who has moved to Florida may be a non-resident, and a foreign national living in Mississauga may be a resident. Section 116 can also apply to an asset purchase from a non-resident where the assets include Canadian real property or other taxable Canadian property.

Subsection 116(5) is what makes this the buyer's problem. A buyer that acquires taxable Canadian property from a non-resident is liable to pay 25% of the amount by which its cost exceeds the certificate limit, if any, as tax on the seller's behalf. The amount is due within 30 days after the end of the month in which the buyer acquired the property, and the buyer may withhold it from the price. With no certificate at all, that is 25% of the full price for the shares, not 25% of the gain.

Subsection 116(5) relieves the buyer in three situations:

1. After reasonable inquiry, it had no reason to believe the seller was a non-resident. The CRA expects prudent measures to confirm residence and will not make the inquiry for the buyer.
2. The property is treaty-protected: after reasonable inquiry the buyer concludes that the seller is resident in a country whose tax treaty with Canada exempts the gain, and the buyer sends the CRA a notice within 30 days after the acquisition. The CRA's Form T2062C can be used for this notice.
3. The CRA has issued a certificate under subsection 116(4) for the property.

IC72-17R6 adds that where buyer and seller are not related, treaty-protected property is excluded from section 116 without any buyer notice, while a related buyer must file Form T2062C within 30 days to get that result. Treaty relief rarely rescues a share sale caught by the real property test, though, because Canada's tax treaties, including the one with the United States, generally keep Canada's right to tax gains on shares that derive their value principally from Canadian real property. In an asset purchase, depreciable property such as a building and certain other property carry a 50% rate instead of 25% under subsections 116(5.2) and (5.3).

The exposure does not fade with time. The CRA's Information Circular IC72-17R6 states that purchaser liability assessments are not subject to any time restriction, and a late remittance attracts penalties and interest.

Certificates often arrive after closing, so the deal documents have to bridge the gap. A share purchase agreement with any chance of a non-resident seller usually includes:

• a representation from each seller about residence for tax purposes, often backed by a statutory declaration at closing;
• a covenant by any non-resident seller to file Form T2062 promptly, ideally weeks before closing as a proposed sale;
• a purchase price holdback of 25% of that seller's share of the price, held in trust by the buyer's lawyer or by an escrow agent; and
• a release-or-remit mechanism: the holdback goes to the seller when the certificate is delivered, and is paid to the Receiver General if the remittance deadline arrives first.

If the buyer has to remit, the seller is not permanently out of pocket. The payment counts as tax paid on the seller's behalf and is credited when the seller files a Canadian return reporting the sale.

Only the seller's residence matters. A U.S. buyer acquiring from Canadian residents has no section 116 issue, while a Canadian buyer acquiring from one founder who has emigrated does. Our guide to cross-border share purchases covers the wider checklist, and a foreign buyer has its own Investment Canada Act filing to make.

A CRA letter confirming that a seller's tax accounts are in good standing is not a substitute. The CRA stopped issuing its account comfort letters on April 1, 2025 and now offers a filing and balance confirmation letter instead. Neither kind of letter releases a buyer from section 116; only the statutory exceptions or a certificate do.

Lucia Ferreira owns 40% of Dixie Road Plastics Inc., a Mississauga manufacturer that owns its $6.5 million plant. She moved to Arizona in 2023 and is now a non-resident. Omar Siddiqui's holding company agrees to buy her shares for $3,200,000; her adjusted cost base is $200,000. The plant has made up more than half of the company's value throughout the past five years, so her shares are taxable Canadian property.

Five weeks before the June 15, 2026 closing, Lucia's accountant files Form T2062 for the proposed sale and Lucia pays the CRA $750,000, which is 25% of her expected $3,000,000 gain. The certificate has not arrived by closing day, so the share purchase agreement lets Omar's company hold back $800,000, 25% of the price, in its lawyer's trust account until July 30, 2026, which is 30 days after the end of the month of closing.

The CRA issues a subsection 116(2) certificate with a $3,200,000 certificate limit on July 21. The buyer's liability falls to zero, the lawyer releases the $800,000 to Lucia, and she reports the sale on her 2026 Canadian non-resident return, where the $750,000 is credited against the tax she actually owes.