Buying property in Ontario can be a smart investment, but if the seller is not a Canadian resident, Section 116 of the Income Tax Act can create costly and unexpected issues. Section 116 ensures that the Canadian government collects capital gains tax from non-residents disposing of taxable Canadian property, including real estate. Buyers who misunderstand this rule can become personally liable for unpaid taxes, making it crucial to understand the risks before closing.

Under Section 116, a non-resident seller must notify the Canada Revenue Agency (CRA) of the sale and obtain a Certificate of Compliance. This certificate confirms that either the required tax has been paid or acceptable security has been provided. If the seller does not obtain the certificate, the buyer is legally obligated to withhold and remit a portion of the purchase price to the CRA. For most real estate transactions, this withholding is 25 percent of the gross purchase price, not just the profit.

The most common trap is that liability shifts to the buyer if this withholding is not correctly handled. Even if the buyer has already paid the full purchase price to the seller, the CRA can still demand the withheld amount directly from the buyer, plus interest and penalties. This risk exists even if the buyer was unaware that the seller was a non-resident.

To avoid these traps, buyers should confirm the seller’s residency status early in the transaction. This is usually done through written representations in the agreement of purchase and sale, supported by statutory declarations. If the seller is a non-resident, the agreement should state that part of the purchase price will be held back until the Section 116 certificate is issued.

MLK Law specializes in guiding buyers through Section 116 compliance. Their experienced real estate lawyers review purchase agreements, ensure proper holdbacks are structured, and coordinate directly with the CRA to secure the Certificate of Compliance. By managing these steps, MLK Law protects buyers from personal liability for the seller’s taxes, helping them complete the transaction smoothly and with confidence.

Timing is also critical. Certificates of Compliance can be obtained either before or after closing, but delays are common. If a certificate is not available at closing, MLK Law ensures that the required holdback is properly remitted within CRA timelines, avoiding penalties and interest.

Section 116 applies not only to obvious foreign sellers. Sellers who reside in Canada but are considered non-resident for tax purposes, as well as corporations, trusts, and estates, may fall under these rules. MLK Law provides tailored advice for these complex scenarios, ensuring every transaction complies with federal tax obligations.

Proactive due diligence and professional guidance are essential when buying property in Ontario. With MLK Law’s support, buyers can identify Section 116 risks early, structure holdbacks correctly, and complete their purchase without unexpected tax liabilities. This careful planning preserves deal certainty, protects cash flow, and ensures compliance with federal tax law for all parties involved.