Darren Brock, a non-resident, borrows $422,000 and invests it in a Canadian rental property which produces gross annual rental income of $72,000. The interest costs on the loan total $6,000, and other expenses of operating the property, including maximum CCA, total $20,000. Which of the following sets of numbers represents first, the amount that would be taxable to Mr. Brock if he reports his rental income under Part I, and second, if he reports his rental income under Part XIII?

Question

Quizplus · Accepted Answer

If Mr. Brock reports his rental income under Part I, he would need to deduct the allowable expenses from his gross rental income. 
Allowable expenses = interest costs + other expenses = $6,000 + $20,000 = $26,000 
Taxable rental income = gross rental income - allowable expenses = $72,000 - $26,000 = $46,000

If Mr. Brock reports his rental income under Part XIII, he would not be able to deduct any expenses and his entire gross rental income would be subject to a 25% withholding tax. 
Taxable rental income = gross rental income x withholding tax rate = $72,000 x 25% = $18,000 
Net rental income after withholding tax = gross rental income - withholding tax = $72,000 - $18,000 = $54,000

Therefore, the correct answer is D, with taxable rental income of $46,000 under Part I and $54,000 after withholding tax under Part XIII.

Darren Brock, a Non-Resident, Borrows $422,000 and Invests It in a Canadian