Non-Resident Heir Inheriting a Canadian Estate in 2026: Section 116, Withholding Tax and the 25% Trap

The Problem: Non-Resident Beneficiaries and the Canadian Tax System

Canada does not have an inheritance tax. That statement is technically correct — and profoundly misleading when the beneficiary lives outside Canada. While a Canadian-resident heir receives their inheritance with no personal tax obligation (the estate pays the capital gains tax before distribution), a non-resident heir triggers an entirely separate layer of CRA compliance obligations that most executors do not anticipate.

Three distinct mechanisms apply when a Canadian estate distributes to a non-resident:

1. Deemed disposition tax — the estate owes capital gains tax on all capital property at death, regardless of who the beneficiary is (ITA s.70(5))
2. Part XIII withholding — the estate must withhold 25% of income-type payments (dividends, interest, RRSP/RRIF proceeds, rental income) made to the non-resident
3. Section 116 holdback — for taxable Canadian property (real estate, private company shares), the executor must hold back 25% of the gross proceeds until CRA issues a certificate of compliance

The combined effect can freeze an estate for 6 to 12 months and reduce the non-resident's inheritance by tens of thousands of dollars. This article covers each mechanism, the timelines involved, available treaty relief, and a worked example using an $800,000 BC rental property passing to a UK-resident heir. For the baseline rules on how Canadian estates are taxed at death, see our complete inheritance tax guide.

Part XIII Withholding: The 25% Default on Income-Type Distributions

Under Part XIII of the Income Tax Act, any Canadian resident — including an estate — that pays certain types of income to a non-resident must withhold 25% of the gross amount and remit it to CRA. This is not a tax on the estate; it is a tax on the non-resident, collected at source by the estate.

In the estate context, Part XIII withholding applies to:

• RRSP and RRIF proceeds distributed to a non-resident beneficiary — 25% of the full account balance
• Dividends from Canadian corporations held in the estate
• Interest income earned by the estate and distributed to the non-resident
• Rental income from Canadian real property held in the estate
• Pension and annuity payments flowing through the estate

The estate reports and remits Part XIII withholding using form NR4, filed with CRA. The non-resident receives an NR4 slip showing the gross amount paid and the tax withheld — similar to how a T4 works for employment income, but for non-resident payments.

Section 116: The Holdback Rule for Taxable Canadian Property

Section 116 of the ITA imposes a separate obligation when a non-resident disposes of — or is deemed to dispose of — taxable Canadian property. In the estate context, the deemed disposition at death under s.70(5) triggers Section 116 for any taxable Canadian property that will ultimately pass to a non-resident beneficiary.

Taxable Canadian property includes:

• Real property situated in Canada (houses, condos, rental properties, vacant land)
• Shares of private Canadian corporations (where more than 50% of the share value is derived from Canadian real property, resource property, or timber)
• Certain interests in Canadian partnerships and trusts
• Canadian resource properties and timber resource properties

Notably, publicly traded shares on a Canadian stock exchange are not taxable Canadian property (since 2010) — so a non-resident inheriting a portfolio of TSX-listed stocks does not trigger Section 116.

The 25% Holdback Obligation

Under Section 116, the purchaser or executor must withhold 25% of the gross sale price (not the gain — the entire proceeds) and remit it to CRA unless a certificate of compliance has been obtained. This is a critical distinction: on an $800,000 property with a $500,000 cost base and a $300,000 gain, the holdback is 25% of $800,000 = $200,000, not 25% of the $300,000 gain.

The executor obtains the certificate by filing form T2062 (Notice by a Non-Resident of Canada Concerning the Disposition of Taxable Canadian Property) with CRA. The form must include:

• The property description and sale price (or fair market value for deemed dispositions)
• The adjusted cost base of the property
• Payment of the estimated tax owing, or acceptable security (such as a letter of credit)

CRA reviews the application and, if satisfied, issues the certificate confirming the tax has been paid or secured. Only then can the executor release the held-back funds to the non-resident beneficiary.

Timelines: How Long the Estate Can Be Frozen

The Section 116 process introduces significant delays into estate administration. Here is a realistic timeline for an estate with taxable Canadian property passing to a non-resident:

Compare this to a domestic estate with a Canadian-resident beneficiary, where the executor only needs the TX19 clearance certificate (not the Section 116 certificate) and the entire process typically takes 8 to 12 months. The non-resident layer adds 3 to 6 months — and that assumes no complications with CRA. For the domestic equivalent, see our adult child inheriting a $1M Ontario estate walkthrough.

Treaty Relief: Reducing the 25% Withholding Rate

Canada has tax treaties with over 90 countries that can reduce the Part XIII withholding rate below the default 25%. Treaty relief is available for income-type distributions only — it does not reduce the Section 116 holdback obligation on taxable Canadian property.

Worked Example: $800,000 BC Rental Property Passing to a UK-Resident Heir

Let us walk through a concrete scenario to see how all three mechanisms interact.

Facts: Margaret, a Canadian resident in Vancouver, dies in 2026. Her estate includes a rental property in Burnaby, BC worth $800,000 at death (adjusted cost base: $450,000). Her sole beneficiary is her son James, who has lived in London, UK for 15 years and is a UK tax resident. Margaret has no surviving spouse.

Layer 1: Deemed Disposition Tax on the Estate

Under ITA s.70(5), Margaret is deemed to have sold the rental property at $800,000 immediately before death. The capital gain is $800,000 – $450,000 = $350,000. Under the 2026 inclusion rate for individuals:

Assuming Margaret had $30,000 in other income before death, her final T1 return shows approximately $221,670 in total income. At combined BC federal-provincial marginal rates, the capital gains portion generates roughly $62,000 to $78,000 in tax. This tax is paid by the estate, not by James. For a deeper look at how capital gains apply specifically to inherited property, see our capital gains on inherited property guide.

Layer 2: Section 116 Holdback on the Property

Because the rental property is taxable Canadian property and James is a non-resident, the executor must comply with Section 116. The executor files form T2062 with CRA and must hold back 25% of $800,000 = $200,000 until CRA issues the certificate of compliance.

In practice, the executor will likely sell the property (James, as a UK resident, cannot easily manage a BC rental from London). When the property sells for $800,000, the real estate lawyer holds $200,000 in trust pending the Section 116 certificate. The executor submits the T2062 showing the $350,000 gain and the estimated tax of approximately $70,000. CRA reviews, and if satisfied, issues the certificate and releases the excess holdback ($200,000 minus the actual tax remitted).

Layer 3: Part XIII Withholding on Accumulated Rental Income

If the rental property earned income between Margaret's death and the date of sale (say, 4 months of rent at $3,000/month = $12,000), the estate must withhold Part XIII tax when distributing this rental income to James. Under the Canada-UK treaty, rental income (classified as "income from immovable property") is taxable in Canada — the treaty does not reduce the withholding rate on real property income. The estate withholds 25% of $12,000 = $3,000.

Total Canadian Tax Exposure: Summary

James receives roughly 85 to 89 cents on the dollar — but only after waiting 12 to 18 months for the estate to clear all CRA requirements. The Section 116 holdback is temporary (the excess is returned after the certificate is issued), but the deemed disposition tax, probate fees, and professional fees are permanent deductions from the estate.

What If the Executor Gets It Wrong?

The consequences of non-compliance are severe and personal:

• Section 116 non-compliance: The executor is personally liable for 25% of the gross property value under ITA s.116(5) — not a percentage of the gain, but of the entire proceeds
• Part XIII non-compliance: The executor is personally liable for the unremitted withholding tax, plus interest and penalties under ITA s.227
• TX19 clearance certificate: Distributing without a clearance certificate exposes the executor to personal liability for all estate taxes under ITA s.159(2)

An executor dealing with non-resident beneficiaries is exposed to three separate personal liability provisions simultaneously. This is why cross-border estate administration fees are significantly higher than domestic estate administration — and why executors should engage a cross-border tax specialist, not just a general accountant. For a full overview of executor responsibilities and liability, see our executor duties guide.

Practical Steps for Executors With Non-Resident Beneficiaries

1. Identify non-resident beneficiaries immediately: The executor needs to know each beneficiary's country of tax residence before making any distributions. This determines Part XIII rates, treaty eligibility, and Section 116 obligations.
2. Engage a cross-border tax specialist early: The intersection of Part XIII, Section 116, and treaty rules requires specialized knowledge. A domestic estate accountant may not be equipped to handle the compliance requirements.
3. File T2062 as soon as possible: The Section 116 certificate application should be filed within 10 days of the property disposition. Late filing triggers penalties of $25/day up to $2,500.
4. Do not distribute before certificates are in hand: Both the Section 116 certificate and the TX19 clearance certificate must be obtained before the executor can safely distribute. Partial distributions are possible for non-TCP assets, but the executor assumes risk.
5. Communicate the timeline to beneficiaries: A non-resident heir expecting a quick distribution needs to understand that 12 to 18 months is the realistic timeline. Setting expectations early prevents conflict between beneficiaries and the executor.
6. Consider treaty relief proactively: If the beneficiary is in a treaty country, apply the reduced withholding rate at the time of distribution rather than withholding at 25% and making the beneficiary file for a refund. This requires documentation but saves the beneficiary months of waiting.