All non-residents disposing of taxable Canadian property must file a T2062 form and obtain a Section 116 tax clearance prior to releasing trust funds.

I have been preparing Section 116 tax filings for more than 20 years. From my perspective, this is one of the most misunderstood sections of Canada's Income Tax Act, or ITA. I will try to shed some light on some traps that can catch the inexperienced adviser and provide a few tips.

Some dos and don'ts:

• Consider engaging an accountant with experience in dealing with T2062 Clearance Requests and Section 116 of the ITA.

These professionals can generally find additional deductions that are often overlooked, such as capital improvements, when receipts and cancelled checks may have been misplaced. They can use other methods to substantiate these expenditures.

Another overlooked cost is when real property is purchased in U.S. dollars. There is a tendency for lawyers to lowball the exchange rate to keep the Canadian dollar value lower and save on land-transfer taxes. If we can substantiate that a deal was in U.S. dollars and the actual exchange rate on closing, per the Bank of Canada, is more beneficial, the deed price can be replaced with the actual rate of exchange. I've seen differences of as much as $4,000 or $5,000.

• Notification of a sale must be sent to the Canada Revenue Agency within 10 days of a sale, as required in Section 116(3); that notice can be made by fax or e-mail, and must include names, address and proceeds. Failure to notify the Revenue Agency can result in penalties of up to $2,500, per Section 162(7) of the ITA. Local Tax Services offices are not shy about assessing this penalty.

• When determining residency, relying on an affidavit is probably not enough; it should be supported with documentation such as a driver's licence, birth certificate, income-tax return, health card, etc. If you suspect that a vendor is not being truthful, you are probably right. If you really want to be sure, have the vendor file form NR74 with the Canada Revenue Agency, which will rule on residency and relieve you of the responsibility.

• Each vendor must obtain an Individual Tax Number or Social Insurance Number. Have form T1261 completed and submitted with proper photo ID.

• I'm seeing more cases where a purchaser's lawyer does not accept the vendor's lawyer's undertaking to obtain a Section 116 clearance when the vendor's non-residency status is established.

In the good old days, it was almost a given that the vendor's lawyer's undertaking was accepted, and 25 percent of the proceeds would be held back by the vendor's lawyer, pending receipt of the clearance. It can be a real burden when, days before closing, the purchaser's lawyer decides he or she wants to only provide 75 percent of the proceeds until the clearance is received, as is allowed by law. There could be a mortgage that has to be discharged, for example, and insufficient funds to do so. There could be substantial tax funds required to accompany the T2062 that must come out of the 75 percent, and the vendor is relying on the proceeds to cover another purchase.

This has proven to be a real problem in some cases. The solution is to get the T2062 approved prior to closing, subject to the completion of the transaction. The Canada Revenue Agency will provide a comfort letter stating that T2062 has been approved and, upon receiving the required S116 withholding tax, the clearance will be issued. Problem solved.

• If a clearance is required quickly, the T2062 can be completed based on the deed purchase price and the sales price and subsequently amended for additional costs - for example, for capital improvements - either by refiling the T2062 or when preparing the Section 115 T1 return the following year.

• Proper documentation is critical. You will not get the clearance unless supported with documentation for capital improvements, appraisals for 1971/1984 if required or to support a non-arm's-length transfer.

• Canadian property is often part of the equalization of property during divorce proceedings. If jointly owned property is transferred to one spouse prior to the actual divorce or as part of a separation agreement, the transfer is deemed to be at fair market value, with income taxes payable on any accrued gains.

If a transfer of property comes as a result of a divorce decree, the property can be transferred at the holder's cost base without income-tax consequences. Timing is everything.

• Finally, a T1 individual tax return is required in all cases by the following April 30.

Each local Tax Services Office handles hundreds of T2062 clearances annually. In my experience, the staff at these offices are more than fair to deal with if provided with a properly completed application.

Ken Lenchyshyn, a certified general accountant and certified fraud examiner, is a manager at the Fort Erie, Ont., office of Crawford, Smith & Swallow Chartered Accountants LLP. He can be reached at ken@forterie.crawfordss.com.