In June 2011, Anibal Kau agreed to buy a Toronto condominium unit for CAD 368,000. The deal closed on June 30, the seller’s lawyer received the full price, and Kau had a new asset. On February 20, 2013, the Canada Revenue Agency assessed him CAD 92,000. That was not the seller’s income tax bill. It was the amount the Income Tax Act required a buyer to remit on the seller’s behalf, because the seller appeared to be a non-resident and no certificate had been obtained. In 2018, the Tax Court of Canada upheld the assessment in Kau v. The Queen, 2018 TCC 156.
That was section 116 of the Income Tax Act working as designed. When certain Canadian property is sold by a non-resident, the Act turns the buyer into a collection point. Most buyers are not caught, but where the rule bites, it bites hard, and the buyer’s protection depends on facts the buyer often cannot control.
What the Kau Case Actually Decided
The vendor had bought the same unit in 2009 using an address for service in Danville, California, and he gave the same address in 2011. He did not live in the unit; a tenant did. Kau’s lawyer requisitioned satisfactory evidence of compliance with section 116 and received a one-sentence statement, headed “affidavit,” in which the vendor said he was not a non-resident for section 116 purposes and would not be one at closing. The notary’s wording showed it was merely declared, so it was unsworn. Kau’s lawyer asked no follow-up questions, and the entire price went to the vendor’s lawyer.
The reasons record that Kau knew from an earlier visit that the vendor did not live in the unit and that it was an investment property. But the analysis turned on the lawyer: the court treated hiring a lawyer as reasonable, asked whether the lawyer had made reasonable inquiry, and attributed the lawyer’s knowledge and conduct to Kau.
The court did not say how the vendor’s non-residency was proved. It called him an “apparent non-resident” and framed the dispute around the protection in paragraph 116(5)(a). The reasons record no express finding or admission on the point, so the case is best read as a decision about reasonable inquiry, not a ruling on where the vendor actually lived.
A California address alone did not decide it. The problem was the combination: that address repeated across two transactions, signing in California, a rental unit the vendor did not occupy, and a bare unsworn statement that engaged with none of it. The court said a basic inquiry is enough when nothing looks amiss, but red flags call for a response that deals with them. It suggested that simple questions, such as the vendor’s permanent address and a copy of his driver’s licence, would have been reasonable, and that a statement answering the red flags would “almost certainly” have been enough. In the alternative, the court held that Kau still had reason to believe the vendor was not resident. The appeal was dismissed, with costs to the Crown.
The CAD 92,000 was exactly 25% of the CAD 368,000 price. Kau is one decision on its facts, not the last word. The current consolidated Act still uses 25% for this kind of property, a point covered below.
What Section 116 Does and Why It Exists
Canada taxes non-residents on gains from taxable Canadian property, but a seller who leaves with the proceeds is hard to collect from. Section 116 solves that by moving the collection point to the closing table. The non-resident vendor must notify the CRA of a proposed disposition, or within 10 days after an actual one, and pay or secure tax so the CRA can issue a certificate of compliance. If no certificate is issued and no protection applies, the purchaser must remit a percentage of the price to the CRA within 30 days after the end of the month in which the property was acquired.
The purchaser is the one party who holds the money and is within the CRA’s reach. The CRA’s circular on section 116adds that the purchaser’s own residence is irrelevant, which is why the rules on foreign buyers, covered in our guide to foreign real estate buyers in Canada, are a separate regime. Section 116 is about the seller’s residency, not the buyer’s.
Which property is caught
Taxable Canadian property includes real property in Canada, along with certain shares, partnership interests and trust interests that derive their value from it. The Act does not distinguish by use, so residences, cottages, rental buildings, vacant land and commercial property can all be caught, whether the vendor is an individual, a corporation, a trust or an estate. A seller who will be a non-resident when the sale closes is caught too.
Subsection 116(6) carves out “excluded property,” such as listed shares and mutual fund trust units, but residential real estate is not excluded. A non-resident can claim the principal residence exemption in part, but the years of non-residence reduce it, and the sale must still be reported and a certificate obtained. For more, see our principal residence exemption guide.
Residency, not citizenship
The question is tax residency. Citizenship, immigration status and domicile are different things. The CRA’s residence folio treats a dwelling place, a spouse or common-law partner and dependants as the ties that will almost always be significant, and weighs secondary ties such as a passport, a driver’s licence and bank accounts together. A Canadian citizen abroad can be a non-resident, and a foreign citizen in Canada can be a resident. A person present in Canada for 183 days or more in a year can be deemed resident under subsection 250(1), and a treaty tie-breaker can deem someone a non-resident under subsection 250(5) despite remaining ties.
How Much a Purchaser Can Owe
Four things need to stay separate. The seller’s underlying tax is Part I income tax on the actual gain, with 50% of a capital gain included in income. The purchaser’s obligation is a statutory remittance generally measured on the price, or on the amount above the certificate limit, not on the gain. The purchaser’s liability arises if that remittance is not made and no protection applies. Penalties and interest may then be added, depending on the facts.
Under subsection 116(5), where the property is capital property such as a home, cottage, vacant land or the land under a rental property, the purchaser is liable for 25% of the amount by which the cost of the property exceeds the certificate limit. The Act describes that amount as tax “on behalf of the non-resident person.” With no certificate, the base is the full price. Under subsection 116(5.3), for the categories listed in subsection 116(5.2), which include depreciable property and real property that is not capital property, the rate is 50% of the amount payable over the certificate amount. The amounts remitted are credited to the seller’s account and settled when the seller files a Canadian return, with any excess refunded, so over-withholding is mainly the seller’s cash flow problem, until the purchaser is the one assessed.
The 35% figure is not current law
Many articles, including some published in 2026, say the section 116 rate rose from 25% to 35%. It did not. Draft legislation in June 2024 would have raised it to 35% from January 1, 2025, as part of the capital gains inclusion rate package, and the Prime Minister cancelled that increase on March 21, 2025. The consolidated Act, current to October 19, 2026, still reads 25% in subsection 116(5) and 50% in subsection 116(5.3). The only live change is Budget 2026, tabled on November 5, 2026. Its tax measures annex proposes lowering the rates from 25% and 50% to 15% and 30% for corporate vendors, for dispositions on or after January 1, 2027. The draft legislation ties the lower rates to the vendor being a corporation, or to the purchaser having no reason to believe otherwise after reasonable inquiry. That is a proposal, not law, and an individual non-resident seller would not qualify for the corporate rates.
Penalties and interest
A failure to remit on time can add penalties and interest. Subsection 227(9) expressly covers amounts payable because of section 116. Its ordinary penalty rates are 3%, 5%, 7% and 10%, depending on the circumstances and the length of the delay, and a 20% penalty can apply where the additional conditions in paragraph 227(9)(b) are met. Subsection 227(9.3) provides for interest, and subsection 227(10.1) lets the Minister assess these amounts, and the section 116 amount itself, “at any time.”
That does not mean every assessment carries penalties and interest. The Kau reasons say nothing about them. Whether they apply depends on when the remittance was due, what the CRA has said in writing about timing, and whether relief is granted. Subsection 220(3.1) gives the Minister discretion to waive or cancel penalties and interest, within ten calendar years, but it is discretionary, and a buyer should not assume relief will be given.
Illustrations
These are illustrative statutory calculations, not determinations of anyone’s actual liability and not the seller’s capital gains tax. All assume no certificate was obtained, no reasonable-inquiry or treaty protection applies, and the amounts are not late. Penalties and interest are excluded.
| Example | Price | Assumption | Statutory amount |
|---|---|---|---|
| A. Kau condominium (2011) | CAD 368,000 | 25%, historical | CAD 92,000 |
| B. Modern residential purchase | CAD 800,000 | Capital property, 25% | CAD 200,000 |
| C. Higher-value residence | CAD 1,500,000 | Capital property, 25% | CAD 375,000 |
| D. Cottage, modest gain | CAD 600,000 | Capital property, 25% | CAD 150,000 |
In Example C, a buyer who pays the full CAD 1,500,000 to the seller and later faces a CAD 375,000 assessment must try to recover that money from a seller who may be overseas.
Example D shows why the statutory amount can dwarf the real tax. Suppose a vacation property held as capital property, never rented, sells for CAD 600,000 against an adjusted cost base of CAD 560,000. The gain is CAD 40,000 and the taxable gain is CAD 20,000. At an illustrative 30% rate, the seller’s actual tax is about CAD 6,000. A seller who obtains a certificate in advance pays 25% of the gain, CAD 10,000, and the certificate limit covers the price. A buyer who closes without one faces 25% of the price, CAD 150,000, which is 25 times the illustrative tax. The certificate limit also scales liability: on a CAD 1,000,000 price with a CAD 800,000 certificate limit, the purchaser’s exposure is 25% of CAD 200,000, or CAD 50,000.
Rental properties and the 50% rate
The 50% rate does not apply to an entire rental property just because it is a rental. Subsection 116(5) excludes depreciable property, and subsection 116(5.2) picks up depreciable taxable Canadian property and real property that is not capital property. Land is not depreciable. A building used to earn income generally is. So a sale of a rental house, a rented condominium, an apartment building or land with a depreciable building can involve two rates, which may call for an allocation of the price between land and building.
For illustration only, suppose a CAD 1,500,000 rental sale is allocated CAD 900,000 to land and CAD 600,000 to the building. The land portion at 25% is CAD 225,000, the building portion at 50% is CAD 300,000, and the combined statutory amount is CAD 525,000. The allocation is an assumption, and the 50% component applies only if the building is properly classified as depreciable taxable Canadian property. A rented condominium, house or apartment building will not necessarily produce the same split, and mixed-use properties add complexity. Real property held as inventory can fall under the 50% rule, but whether a property is inventory is a factual question. A tax adviser should settle the classification and any allocation before closing.
Is this fair?
The collection purpose is sound, but the design puts a large burden on a private party who is held to a lawyer’s conduct, with the cost of error measured against the gross price. The proposed 2026 reduction for corporate vendors suggests over-withholding is a recognized problem.
What Counts as Reasonable Inquiry
The central protection is in paragraph 116(5)(a): a purchaser is not liable if, after reasonable inquiry, the purchaser had “no reason to believe that the non-resident person was not resident in Canada.” The statute does not define reasonable inquiry. Three layers need separating: what the law establishes, what the CRA says administratively, and what is practical inference.
What the law establishes
The statute sets the standard, and Kau applies it. From Kau, a basic inquiry can be enough when nothing looks amiss, red flags call for an inquiry that addresses them, a lawyer’s inquiry and knowledge are attributed to the purchaser, and the statute does not require a sworn document. Because even a sworn statement would have had to answer the red flags, an affidavit is not an automatic safe harbour.
What the CRA says administratively
The CRA’s circular says only that the purchaser must take prudent measures to confirm residence, that each case is reviewed on its facts, and that the CRA will not make the inquiry for the purchaser. In a technical interpretation of an arm’s-length real estate transaction, the CRA said a statutory declaration from the seller generally meets the standard, but only if nothing else suggests non-residency. That link is a third-party reproduction, not a CRA-hosted copy, and a technical interpretation is the CRA’s view, which does not bind the courts.
Practical inference
A Canadian mailing address, passport, driver’s licence and bank account are secondary residential ties in the CRA’s framework, so they are relevant but none is decisive, and mail can be forwarded. Canadian citizenship does not determine tax residency. Canadian tax filings help if they were filed as a resident, but no authority is cited here treating them as conclusive.
Warning signs raise the bar. Kau involved a foreign address for service, signing abroad and an investment property the seller did not occupy. An overseas power of attorney or inconsistent information about where the seller lives would logically raise the same concern, although no decision on those facts is cited here. Reasonable questions might include the seller’s permanent address, where the seller last filed a return, where the family lives, and identification. Those are examples, not a statutory checklist; a warning sign calls for more investigation, not less.
The Act itself offers a short list of protections: a certificate of compliance, the treaty-protected property rule in subsection 116(5.01) with its conditions, and a reasonable inquiry that leaves no reason to believe the seller is non-resident. They are statutory protections, but none is guaranteed, because each depends on conditions being met.
The Section 116 Certificate of Compliance
A section 116 certificate of compliance is the CRA’s confirmation that the non-resident has paid, or secured, the tax required under section 116. The seller applies for it. For a proposed disposition, the CRA issues a certificate fixing a certificate limit, generally the estimated proceeds, once the seller pays 25% of the estimated gain or provides acceptable security. For a completed disposition, the notice is due within 10 days after the sale. A certificate issued under subsection 116(4) is itself a protection under paragraph 116(5)(b).
Form T2062 is the general request for dispositions of taxable Canadian property, including real property held as capital property. Form T2062A covers the subsection 116(5.2) categories, and where both apply they are filed together. The CRA’s page on acquiring and disposing of certain Canadian property lists the supporting documents, and missing documents delay the certificate.
Timing matters. A certificate obtained before closing is the cleanest outcome. One obtained after closing but before the remittance deadline is the ordinary route when a holdback is used, because the remittance is not yet due. The Act does not clearly address a certificate issued after the 30-day deadline, or after the CRA has assessed the purchaser, and its effect on penalties, interest or an existing assessment is unsettled. A late certificate should not be assumed to cancel any of them. The statutory remittance is due 30 days after the end of the month of acquisition, and applying for a certificate does not by itself suspend it.
The CRA has published its own position on comfort letters. In COVID-era guidance, it said that where a certificate has been requested but not issued by the time the remittance is due, the purchaser or vendor may ask for a comfort lettertelling the purchaser to keep the withheld funds until the CRA finishes its review, and that if the tax is remitted when requested, it will not assess a penalty or interest on that amount. That page describes administrative relief, not an interpretive position, and its current operation is uncertain, so it is treated here as guidance only. In its 2025 answers to CPA Canada, the CRA said it issues letters only on request, made before the remittance is due and after a complete T2062 has been received, with the request stated in the cover letter. It said it tries to issue them within three business days, which is a processing objective and not a guarantee, and that a purchaser may instead remit the full withholding and receive an acknowledgment. A comfort letter does not amend section 116. The statutory amount remains due, and the terms of the actual correspondence govern. Obtaining the certificate early, arranging a holdback and dealing with the CRA before the deadline remain the conservative course.
Holdbacks and Closing Practice
Lawyers manage this risk with a mix of tools. Standard Ontario forms give the buyer a credit against the price for the amount payable to the CRA unless the seller delivers a clearance certificate or a statutory declaration at closing. Where there is doubt, the lawyer may request a certificate, an undertaking from the seller’s lawyer to obtain one, and a holdback. LawPRO’s section 116 checklist recommends that combination when the certificate is not available at closing.
These tools are different things, and mixing them up is where buyers get hurt. A contractual holdback is a private arrangement: money kept in trust under the agreement. A statutory remittance is a payment to the CRA, due on a date set by the Act. Holding money in trust past that date does not by itself satisfy the remittance obligation unless valid relief applies. A comfort letter is the CRA’s administrative response, a CRA acknowledgment of payment confirms a remittance was made, and a lawyer’s undertaking is a promise from another professional, not relief from the CRA. A private indemnity gives the buyer a claim against the seller, which is only as good as the seller’s assets. In Kau, there was a lawyer, and the buyer was still assessed.
Canadians Who Move Abroad
Take a Canadian who moves to Portugal, retires in Mexico or takes a job in the United States, keeps a Canadian rental property, and later sells it. Citizenship does not remove section 116. If the person has become a non-resident, the sale is caught, and a person who is resident today but will be non-resident at closing is caught too.
The harder question is whether the person has actually become a non-resident. Moving abroad does not settle it. The CRA looks at whether significant residential ties were severed, and a home, spouse or dependants left behind can keep someone resident. A treaty can deem the person a non-resident under subsection 250(5) only if its tie-breaker places the person in the other country. The facts decide it. Our guides to departure tax and to snowbird versus full relocation cover the residency side.
Estates and Inherited Property
The CRA’s circular says section 116 does not apply to the deemed disposition on death, and property that passes as a consequence of death is excluded. But a later sale of Canadian real property by an estate that is itself non-resident is a different event and can trigger the rules.
The estate’s residency is not the same as the deceased’s, the executor’s, the beneficiaries’ or the property’s location. The CRA’s folio on trust and estate residence applies the Supreme Court’s central management and control test and says the trustee’s residence does not always decide the question. An executor living abroad therefore does not automatically make the estate non-resident. See our guide to wills and estate planning for the broader picture.
When the CRA Assesses the Buyer
If the CRA assesses a purchaser after closing, the purchaser can recover the amount from the seller. Subsection 116(5) says so directly, and a contractual indemnity can reinforce it. But a right is not a recovery, because the seller may be overseas or without Canadian assets. A purchaser may also have a separate professional negligence claim where the facts support one. In Mao v. Liu, 2017 BCSC 226, purchasers of a Vancouver property for CAD 5,560,000 later faced a CRA assessment of more than CAD 600,000 because a registered owner was a non-resident. They sued their notary and his notary corporation, who had agreed to make the reasonable inquiry. The British Columbia Supreme Court applied the standard of a reasonably competent notary and found the defendants liable, with damages to be assessed. The procedural history is more complicated than a simple final judgment. The notaries appealed, but the matter settled before the appeal was heard, and a consent order allowed the appeal and remitted the purchasers’ claims for retrial. No retrial took place. The notaries later brought separate contribution and indemnity proceedings against others involved in the transaction, including the law firm Borden Ladner Gervais, and the 2020 decision in Liu v. Borden Ladner Gervais LLP, 2020 BCCA 50, concerned whether those separate claims could proceed. Mao illustrates professional liability risk, but it is a civil case between purchasers and their conveyancer, not a Tax Court decision, and it does not alter the purchaser’s statutory obligation to the CRA. Recovery from a seller or a professional is never automatic.
The statutory liability and any contractual or professional claim are separate matters. A purchaser assessed under section 116 can object to the assessment and, if the objection does not resolve it, appeal to the Tax Court of Canada. Objection deadlines may differ depending on the assessment, so a cautious buyer should act promptly and treat 90 days from the notice of assessment as a conservative planning period, not a statement of the legal deadline. The general rules are in section 165. A Tax Court appeal can follow under section 169 once the CRA confirms or reassesses, or after 90 days without a response. Budget 2026 proposes to lengthen the objection deadline, but that is not yet law.
Practical Lessons
Buyers should raise seller residency with their lawyer early, especially when anything cross-border is visible: an overseas address, documents signed abroad, an investment property, a power of attorney. A standard declaration is not a complete answer once something looks off.
Sellers who have left or are leaving Canada should plan the sale before listing, file for the certificate early, and expect cash to be tied up. Executors should confirm the estate’s tax residency, not rely on their own address.
International mobility creates opportunities, but obligations do not disappear because the property sits in Canada. The buyer’s exposure can be substantial, and careful planning can manage it.
This article is general information and does not replace legal or tax advice for a specific transaction.