Section 116 Purchaser Liability Calculator
Buy taxable Canadian property from a non-resident without a clearance certificate and the tax becomes yours, not the vendor’s. Work out the withholding, the holdback to retain, the notification deadline, the remittance date and what the vendor actually gets back.
to hold back at closing
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The Dates That Matter
| Event | Rule | Date |
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Withholding and Holdback
| Item | Basis | Amount |
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The Vendor’s Actual Tax
| Line | Basis | Amount |
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Points That Decide This
What to Do Next
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Disclaimer: Section 116 of the Income Tax Act applies where a non-resident person disposes of taxable Canadian property. Under subsection 116(3) the vendor must notify the Minister within ten days after the disposition where no notification was given in advance under subsection 116(1). The penalty for failing to notify is imposed under subsection 162(7) at $25 for each day of default, with a minimum of $100 and a maximum of $2,500. Under subsection 116(5) a purchaser who acquires taxable Canadian property from a non-resident is liable to pay, and entitled to deduct from the amount paid to the vendor, 25% of the amount by which the cost of the property exceeds the certificate limit fixed under subsection 116(2), unless after reasonable inquiry the purchaser had no reason to believe the vendor was a non-resident. Subsection 116(5.3) applies a 50% rate to dispositions of depreciable taxable Canadian property, resource property and certain other property. The amount must be remitted within thirty days after the end of the month in which the property was acquired. Treaty-protected property may be excluded where the purchaser gives notice within the required period. Capital gains are modelled at a 50% inclusion rate, with the vendor’s Canadian tax estimated at 25% for a non-resident corporation and at an illustrative 30% average rate for a non-resident individual; actual rates depend on the vendor’s full circumstances, on graduated rates for individuals, on recapture of capital cost allowance on depreciable property, and on any surtax applying to income not earned in a province. This page is general information, not tax or legal advice, and no purchaser should close without independent confirmation of the position.
The Liability Lands on the Buyer
This is the fact that makes section 116 different from almost every other withholding rule. If a non-resident sells taxable Canadian property and the tax is not accounted for, the Canada Revenue Agency does not have to chase the vendor abroad. It assesses the purchaser, who is in Canada, has assets in Canada, and is easy to reach.
The purchaser is liable for twenty-five per cent of the purchase price, not twenty-five per cent of the vendor’s gain. On a property bought for $1,200,000 that is $300,000 of exposure, regardless of whether the vendor made a profit at all.
The purchaser pays the vendor’s tax and then has to recover it from the vendor. By the time the assessment arrives, usually months after closing, the vendor has the full proceeds and is in another country. That recovery rarely happens, which is why the holdback is the only real protection available.
What Counts as Taxable Canadian Property
The category is wider than most purchasers expect, and it is not limited to real estate.
- Real or immovable property situated in Canada, including land, buildings and interests in them
- Canadian resource property and timber resource property
- Shares of a corporation, where more than half the share value derives, directly or indirectly, from Canadian real property, resource or timber property at any time in the preceding sixty months
- Interests in partnerships and trusts meeting the same value test
- Property used in a business carried on in Canada in certain cases
The share rule catches transactions that look purely corporate. Buying the shares of a Canadian company from a non-resident shareholder is a section 116 transaction if that company’s value rests mainly on Canadian real property, even where nobody is transferring a deed.
The Two Rates
| Property Disposed Of | Withholding Rate | On $1,200,000 |
|---|---|---|
| Real property, non-depreciable | 25% | $300,000 |
| Shares of taxable Canadian property | 25% | $300,000 |
| Depreciable real property | 50% | $600,000 |
| Canadian resource property | 50% | $600,000 |
The fifty per cent rate on depreciable property exists because the vendor may face recapture of capital cost allowance as well as a capital gain, and recapture is fully taxable rather than half. A commercial building is usually part land and part building, so a single transaction can attract both rates on different components.
Where a property has both a land and a building component, the allocation in the agreement drives which rate applies to which part. An agreement that states a single undivided price leaves the purchaser exposed to the higher rate being applied more broadly than necessary.
The Clearance Certificate Is the Whole Mechanism
The vendor applies to the CRA, discloses the cost base and the proceeds, and pays or secures the tax on the actual gain. The CRA then issues a certificate under subsection 116(2) fixing a certificate limit. The purchaser withholds twenty-five per cent of the excess of the price over that limit, which is usually nil where the certificate covers the full price.
| Certificate Position at Closing | Purchaser Should Withhold | Risk |
|---|---|---|
| Issued, limit equals the price | Nothing | None, keep the certificate on file |
| Issued, limit below the price | 25% of the excess | Low, the calculation is defined |
| Applied for, not yet issued | Full amount, held in trust | Manageable with proper holdback wording |
| Not applied for | Full amount, and remit it | High, the liability is live |
| Vendor asserts residency without proof | Full amount | Reasonable inquiry is the only defence |
Certificates take time. Applications routinely run for months, which is why the holdback is designed to survive past closing rather than to be released on the closing date.
The Reasonable Inquiry Defence
The statute relieves a purchaser who, after reasonable inquiry, had no reason to believe the vendor was a non-resident. That defence is narrower than it sounds and it is not satisfied by the vendor simply saying so.
- A statutory declaration of residency from the vendor, sworn rather than merely stated
- Supporting identification consistent with Canadian residency
- Attention to the surrounding facts, such as a foreign address on the agreement, funds directed offshore, or a power of attorney used throughout
- A record of the inquiry made, kept with the closing file rather than recalled afterwards
A declaration taken while the file shows a foreign mailing address and an offshore payment direction is not a reasonable inquiry. Where the surrounding facts point one way, a declaration pointing the other way is evidence that the purchaser had reason to believe otherwise, not evidence that they did not.
The Deadlines
| Obligation | Who | Deadline |
|---|---|---|
| Advance notification | Vendor | Before the disposition |
| Notification after closing | Vendor | Within 10 days of the disposition |
| Remittance of withheld tax | Purchaser | Within 30 days after the end of the month of acquisition |
| Vendor’s Canadian return | Vendor | The ordinary filing deadline for the year |
The notification penalty is $25 a day, with a minimum of $100 and a maximum of $2,500. It is a modest number against the withholding itself, but it accrues from the eleventh day and it is entirely avoidable.
What the Vendor Gets Back
The withholding is a payment on account, not a final tax. The vendor files a Canadian return for the year of disposition, reports the actual gain, and receives the difference back. On a property bought for $1,200,000 with a cost base of $700,000, the gain is $500,000 and the taxable half is $250,000. The tax on that is far less than the $300,000 withheld, so most of the withholding comes back.
That is worth saying to a vendor who resists the holdback. The money is theirs and they will get it, but the mechanism for getting it is a filed return rather than a closing adjustment.
The vendor’s route to the money is the clearance certificate, applied for early. A vendor who applies before closing usually avoids the holdback entirely. A vendor who refuses to apply is asking the purchaser to carry their tax risk, and no purchaser should agree to that.
What This Calculator Does Not Cover
- Recapture of capital cost allowance on depreciable property, which is fully taxable and can exceed the capital gain
- The vendor’s graduated rates, province of taxation and any surtax on income not earned in a province
- Treaty-protected property and the notice a purchaser must give to rely on it
- GST/HST on the transaction, which follows its own rules and its own self-assessment mechanism
- Land transfer tax and any non-resident speculation tax applying in the province concerned
- Partnership and trust interests, which meet the definition but need their own analysis
The holdback wording belongs in the agreement of purchase and sale, not in a discussion on the closing date. Our non-resident tax return service covers the certificate application, the holdback mechanics, the remittance and the vendor’s Canadian filing.
Frequently Asked Questions
Common questions on buying property from a non-resident vendor.
Related Calculators and Guides
More tools for cross-border transactions and non-resident vendors.
Do Not Close Without the Certificate or the Holdback
Send us the agreement of purchase and sale, the vendor’s residency details and the closing date. We will fix the withholding rate, draft the holdback wording, handle the certificate application and the remittance, and prepare the vendor’s Canadian return to recover the balance.