23 August 1991 External T.I. 911900 F - Withholding Tax Exemption for Interest Payable on a Mortgage Respecting Property Outside Canada

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.

Dear  19(1)

Re:  Application of subparagraph 212(1)(b)(viii) of the Income Tax Act (the "Act")

This is in reply to your letter of July 8, 1991 concerning whether withholding tax is exigible in the following hypothetical situation.

An individual resident in Canada purchases a real estate property situated outside Canada.  The proceeds of a mortgage on the property are used to finance the acquisition of such property.  The mortgagee is a non-resident of Canada.  The property will be used to earn rental income and the individual will not claim C.C.A. in computing the income from such property.

It is your understanding that there would be no withholding tax required on the payments of interest made to the non-resident and that such interest payments would be deductible in computing the income from the rental property situated outside Canada.

Subparagraph 212(1)(b)(viii) of the Act exempts interest payable on a mortgage, secured by real property situated outside Canada, from withholding tax in Canada except to the extent that the interest payable on the mortgage is deductible in computing the income of the individual from:

(1) a business carried on by him in Canada;

(2) real property situated in Canada; or

(3) personal property situated either inside or outside Canada.

In view of the above, we do not have sufficient facts to determine whether or not the interest paid on the particular mortgage will be exempt from withholding tax in Canada.  However, where the mortgage is, and continues to be, secured by the real property situated outside Canada and the interest is deducted in calculating the income from such real property any interest paid or credited  to the non-resident will be exempt from withholding tax.  The treatment to be afforded to such interest will be the same whether or not the individual generates an income or loss from such property in a particular year.

A reasonable portion of any interest paid in respect of money borrowed to purchase the foreign rental property would be deductible in computing the income from such property.  Rental losses are only deductible from other income provided there is a reasonable expectation that the rental activity will produce a profit after deducting all expenses.  Any losses incurred by the individual from such property may be deductible in computing his income in the current year or carried to other years, in accordance with the Act, provided the individual was a resident of Canada in each of the years.

Enclosed for your perusal is a copy of the 1989 guide issued by Revenue Canada, Taxation entitled " Rental Income Tax Guide".

We trust the above comments are adequate for your purposes.

for DirectorReorganizations and Non-ResidentRulings DirectorateLegislative and Intergovernmental Affairs Branch