15 November 1990 Internal T.I. 902937 F - Interest Paid to Non-resident

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.

19(1)

November 15, 1990

Dear Sirs:

Re:  Interest Paid to Non-Resident

This letter is in response to your correspondence dated October 19, 1990 wherein you requested our interpretation of section 212 of the Income Tax Act (the "Act") and Article XI of the Canada-U.S. Income Tax Convention (1980) (the "Convention") in the context of the following set of hypothetical facts:

1.     An individual ("X"), who is neither a resident of Canada nor the United States for the purposes of the Convention, borrows money from a lender resident in the United States.

2.     The borrowing are secured solely by a mortgage on property located in the United States.

3.     X uses the borrowing to acquire a rental property in Canada. The Canadian rental property will not be pledged as security for the borrowing.

4.     X will derive property income from the rental property and will file an income tax return in Canada as permitted under section 216 of the Act wherein she will report the rental income. She will deduct the interest paid to the U.S. lender in calculating her tax liability under section 216 of the Act.

You question whether the interest paid to the U.S. lender will be subject to Canadian withholding tax under section 212 of the Act and whether that tax is reduced under Article XI of the Convention.

Provided the rental property does not represent a rental business, the interest paid by X to the U.S. lender would not be subject to Canadian withholding tax under paragraph 212(1)(b) of the Act. In such circumstances the Convention would not have application. However, if the renting of the Canadian property constitutes a rental business, subsection 212(13.2) of the Act may deem X to be resident in Canada for the purposes of Part XIII of the Act. Accordingly if this were the case, the interest paid to the U.S. lender would be subject to Canadian withholding tax under paragraph 212(1)(b) of the Act. Paragraph 6 of Article XI of the Convention would deem such interest to arise in Canada because the interest would be borne by a permanent establishment or fixed base (i.e. a rental building) in Canada. Accordingly, paragraph 2 of Article XI of the Convention would give Canada the right to tax such interest. However, the rate of 25% otherwise withheld under subsection 212(1) of the Act would be reduced to 15% by Article XI of the Convention.

The nature of a rental operation carried an by a non-resident individual is a question of fact and Interpretation Bulletin IT-434R outlines Revenue Canada's position as to whether a rental operation constitutes a business.

In the event there is no requirement to withhold tax under subsection 212(1) of the Act from an amount paid to a non-resident, there is no statutory requirement to notify Revenue Canada.

We trust this is the information you require.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorLegislative and Intergovernmental Affairs Branch