"JPW" <jpwilcox[at]comcast.net> wrote:

- quote -

I'm confused as to why there would be any kind of
withholding on interest paid TO a bank. This is not
interest income to the taxpayer. This is deductible
mortgage interest.

Mike

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JPW wrote:

- quote -

I only have a cursory understanding of the US-Canada tax
treaty, but this doesn't seem correct. The "source" of
the income (for tax purposes) seems to be the Canadian
property rather than the US resident. But, to continue....

- quote -

It's outside the bounds of this newsgroup to answer the
question of whether this gross-up is legal under Canadian
banking laws -- my guess would be "no". It should also
be pointed out that this withholding would be considered
a foreign tax for the purpose of the bank's Canadian income
tax return, and therefore eligible for the foreign tax
credit to the extent that the bank's Canadian income
tax rate is greater than the withholding rate (10%?).

Furthermore, it would be the US resident's responsibility
to pay the IRS, rather than the Canadian bank's.

However -- I could easily be wrong, and my wife and I
are considering buying a Canadian vacation home, so we
would be interested in the outcome.

--
This account is subject to a persistent MS Blaster and SWEN attack.
I think I've got the problem resolved, but, if you E-mail me
and it bounces, a second try might work.
However, please reply in newsgroup.

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A U.S. resident purchased a Canadian property and financed
it with a Canadian bank. The Canadian bank is telling the
U.S. resident that there must be U.S. withholding on the
interest income received by the Canadian bank because it
comes from a U.S. resident. The property may not be
completely cash flow positive, but most of the funds for
paying the mortgage will come from Canadian rental income.

Is there anyone familiar with this withholding requirement
and whether exceptions apply? I know that if the source of
the income is the U.S. then it is correct that U.S.
withholding would be correct. Also, the location of the
U.S. resident seems to source the interest income to the
U.S. The bank plans to gross up the rate of interest so
that the U.S. resident is paying the full mortgage payment
and the bank's U.S. withholding taxes.

Thank you in advance for your help.

Jeff

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