Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Where a Canadian resident who is a former citizen of the Netherlands, has an immovable property situated in the Netherlands and has received rental income therefrom, whether such rental income will be subject to the Canadian tax?
Position:
Yes.
Reasons:
Paragraph 1 of Article 6 of the Canada- Netherlands Income Tax Convention (the "Netherlands Tax Treaty") does not preclude Canada from taxing the rental income from the immovable property that is sourced from the Netherlands.
XXXXXXXXXX 2001-008477
Daniel Wong
(613) 954-4949
December 18, 2001
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: XXXXXXXXXX - the Canada-Netherlands Income Tax Convention (the "Netherlands Tax Treaty")
This is in reply to your letter of March 1, 2001 addressed to the XXXXXXXXXX wherein you advised that you and your spouse are former citizens of the Netherlands and residents of Canada. You requested a technical interpretation concerning the tax treatment of a rental loss that your spouse has incurred relating to an immovable property that she owns in the Netherlands. Your request was forwarded to the Income Tax Rulings Directorate for reply.
In your letter, you outlined what appears to be an actual fact situation related to your spouse's transactions and events which have taken place. As we do not have your spouse's authorization on file, we are not in a position to discuss her tax matter with you. Further, the review of such situations is generally the responsibility of the local taxation services offices and, as outlined in paragraph 22 of Information Circular 70-6R4, it is not our practice to provide specific opinions on factual situations otherwise than in the context of an advance income tax ruling. In any event, a request cannot be considered for a ruling when the transactions are completed or where the issues involved are primarily questions of fact.
Nevertheless, we are prepared to provide the following comments which we hope will be of assistance to you.
Under the Income Tax Act (the "Act"), a Canadian resident is required to report his or her worldwide income from sources both inside and outside Canada. However, where the Canadian resident paid income tax to a foreign country on any of his or her income that is sourced from that foreign country, he or she may be eligible to claim a foreign tax credit for such income tax paid to that foreign country.
Where the Canadian resident has an immovable property situated in the Netherlands and has received rental income therefrom, such rental income will be subject to the Canadian tax. Paragraph 1 of Article 6 of the Netherlands Tax Treaty does not preclude Canada from taxing the rental income from the immovable property that is sourced from the Netherlands. However, under Article 22 of the Netherlands Tax Treaty, Canada will grant a foreign tax credit to the Canadian resident for any income tax paid to the Netherlands government on any of such rental income that is sourced from the Netherlands.
In computing the Canadian resident's rental income or loss from the rental activity of the immovable property in the Netherlands for a particular taxation year, only reasonable expense incurred by the Canadian resident that is of a current or operating nature relating to the immovable property in the Netherlands, can be deducted against the gross rental income from the immovable property for the particular taxation year. However, any expenditure incurred by the Canadian resident that is of a capital nature relating to the immovable property in the Netherlands, will not be deductible pursuant to paragraph 18(1)(b) of the Act, but rather, a portion of such expenditure that is allowed by the Regulation to the Act, may be deductible by the Canadian resident as capital cost allowance. Such capital cost allowance claimed by the Canadian resident cannot create a rental loss in respect of the immovable property. The Rental Income Guide (T4036) describes some of the factors that the Canada Customs and Revenue Agency (the "CCRA") will consider in deciding whether an expense is capital or current. You may obtain a copy of the Rental Income Guide from a near-by taxation services office.
Where the Canadian resident has incurred a rental loss with respect to the immovable property in the Netherlands for a particular taxation year, and provided that the rental activity is carried on as a business with a reasonable expectation of profit, the Canadian resident may apply such rental loss against his or her other income in the particular taxation year. Any unused portion of such rental loss will be a non-capital loss which can be applied in the Canadian resident's 7 immediate preceding taxation years and 3 immediate following taxation years. However, where it is determined that such rental activity does not have a reasonable expectation of profit, the Canadian resident will not be considered to have carried on a business in respect of the immovable property in the Netherlands. Consequently, any losses that resulted from the rental activity will not be deductible by the Canadian resident for Canadian income tax purposes.
Whether the Canadian resident is carrying on the rental activity with a reasonable expectation of profit is an objective determination that can only be made upon an examination of all relevant facts surrounding the particular circumstance. The factors that the CCRA will consider in determining whether an activity is a business carried on with a reasonable expectation of profit are set out in the Department's response to question 75 at the 1984 Canadian Tax Foundation Revenue Canada Round Table, a copy of which is attached.
These comments are provided in accordance with paragraph 22 of Information Circular 70-6R4.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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