Solution%20to%20Assignment%20Problem%20Ch20

However as mr holt earned employment income in canada

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However, as Mr. Holt earned employment income in Canada, this situation is covered by the provisions of the Canada/U.S. tax treaty. Article XV states that a resident of the U.S. is exempt from Canadian tax if either of the following conditions are met: 1. The remuneration for employment does not exceed C$10,000 in the calendar year. 2. The employee is not present in Canada for more than 183 days and his remuneration is not paid by an employer with a permanent establishment in Canada who would be able to deduct the amount paid from their Canadian Taxable Income. Mr. Holt’s remuneration was in excess of C$10,000 and his services appear to have been ultimately paid for by the Canadian subsidiary. As a result, he is subject to Part I taxes in Canada and should file a personal tax return for the year. A foreign tax credit can be claimed in the U.S. for any Canadian taxes paid. Case B There is no question that Mr. McQueen has ceased to be a resident of Canada. However, he would be liable for the Part XIII withholding taxes on his Canadian source investment income. With respect to the dividends, ITA 212(2) requires the payment of Part XIII tax on all amounts credited to Mr. McQueen’s account. Note the withholding is on the amounts credited to the account and not on the amount of payments to Mr. McQueen. The broker would be responsible for withholding the tax and no deductions would be allowed for any fees or commissions. The mortgage payments will consist of a combination of principal and interest. The principal payments are a return of capital and are not subject to any type of tax. With respect to the interest, only interest on participating debt and non-exempt interest paid to a non-arm’s length non-resident is subject to Part XIII tax. The mortgage interest does not appear to fall into either of these categories and, as a consequence, would not be subject to Part XIII tax. Case C Hotels International is a U.S.company and the annual lease payment of $1,250,000 will be subject to Part
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XIII withholding tax. Under the Canada/U.S. tax treaty, this will be at the rate of 25 percent. Normally, when rental payments are made to persons outside of Canada, no deductions are permitted for such items as property taxes, mortgage interest, and insurance on the building. There is, however, an alternative available to Hotels International. The Company has the alternative, under ITA 216, of filing a Canadian tax return and reporting all of its rental income from Canadian sources as if it were a resident of Canada. Net rental income would then be the $1,250,000 lease payment, reduced by all deductible expenses. However, this would subject the Company to Part I taxes. The Company should decide whether this approach would represent a more favourable form of income taxation and, if so, file a Canadian corporate income tax return to report rental income and expenses.
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