5-903399
Re: Request for Technical Interpretation Subparagraph 212(1)(b)(viii) of the Income Tax Act (the "Act")
We are writing in response to your letter, dated November 26, 1990 in which you outlined two situations regarding the above-noted provision of the Act.
Situation 1
A Canadian resident owns real property situated outside Canada.
You wish to know whether interest payments made to a non-resident mortgagee would be subject to tax under Part XIII of the Act if the interest expense is deducted under Part I of the Act against income from property situated in Canada.
Our comments
The interest payments referred to above would be subject to Part XIII tax because the exemption from Part XIII tax provided for in subparagraph 212(1)(b)(viii) would not apply.
It is our view that the phrase "situated outside Canada" at the end of subparagraph 212(1)(b)(viii) modifies only the words "real property" and not the entire phrase "property other than real property".
Accordingly, the exemption from withholding tax provided for by subparagraph 212(1)(b)(viii) in respect of interest payable on a mortgage secured by real property situated outside Canada is not available to the extent that the interest payable is deductible in computing the income of the payer:
(a) from a business carried on by him in Canada; or
(b) from property, other than from real property situated outside Canada.
In the situation outlined, an amount of interest is deductible under Part I of the Act against income from property situated in Canada. Since income from property situated in Canada cannot be considered to be income from real property situated outside Canada, the exemption does not apply.
Situation 2
A Canadian resident mortgages real property situated outside Canada. We have assumed that the mortgage proceeds are used to finance the acquisition of the property. The individual incurs a rental loss on this real property situated outside Canada (after deducting the mortgage interest but before deducting capital cost allowance).
You wish to know whether the interest on the above mortgage, paid to a non-resident mortgagee, would be subject to Part XIII tax.
Our comments
It is our view that subparagraph 212(1)(b)(viii) would exempt from Part XIII tax the interest payable on such a mortgage, since the interest would be payable on a mortgage secured by the real property situated outside Canada and the interest would be deductible only in computing the income of the payer under Part I from real property situated outside Canada. This would be our view notwithstanding the fact that the resulting rental loss might offset the income of the payer from Canadian sources.
We apologize for the delay in responding to your enquiry. If you should have any questions regarding our response, please contact us.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for Director Reorganizations and Non-resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch