15 January 1986 Income Tax Severed Letter 5-0012 - []

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.

XXXX C: Thornley (613) 995-2455

January 15, 1986

Dear Sirs:

This is in reply to your letter dated November 5, 1985 concerning the interpretation of subsection 212(13)' of the Income Tax Act (the "Act") in the following situation:

1. A non-resident individual owns a piece of real estate in Canada.

2. The non-resident obtained financing from another non-resident, and the indebtedness is issued after March 31, 1977 and secured-by the real estate property in Canada.

3. The individual makes an election under section 216 of the. Act to pay tax on net rental income.

4. In computing net rental income in Canada, the individual elects to capitalize all interest paid to the non-resident lender under subsection 21(1) of the Act.

It is your view that the interest covered by a section 21 election is not deductible in computing the non-resident's taxable income earned in Canada or the amount on which he is liable to pay tax under Part I of the Act.* Thus, in your view, such interest payments to another non-resident are not subject to Part XIII withholding tax under paragraphs 212(1)(b) and (13)(f) of the Act.

We are not in agreement with your view as paragraph 212(13)(f) of the Act uses the phrase "is deductible" and not "is deducted".

As it is generally conceded that "deductible" means capable of being deducted, it is our view that the mortgage interest in your situation is deductible pursuant to the provisions of paragraph 20(1)(c) of the Act. An election pursuant to section 21 of the Act is at the option of a taxpayer and thus, does not, in our view, change the situation. However, if it did, we note that as paragraph 212(13)(f) of the Act does not require the deductibility to be pursuant to any particular provision, the capitalized interest would, pursuant to the capital cost allowance provisions of the Act, still be considered to be an amount deductible for purposes of paragraph 212(13)(f) of the Act.

We trust these comments will be of assistance.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch