Canadian wants to buy rental property in Italy - IT

My question is: Canadian-specific
QUESTION: We are considering buying a property in 
Italy, which we hope to rent out.would 
appreciate We currently own a house in 
Canada, and have three years left on our 
My questions are these:
1.   What is the best way to finance the 
purchase of foreign property?
2.  What are the tax laws regarding the 
income on the rental property in Italy?
Many thanks, Y
david ingram replies:
I once had a client (whose name would be recognized by everyone in Vancouver) arrested and charged with tax evasion for not reporting income earned in Italy an d the United states form his rentals and bank accounts.  Revenue Canada flew in the assistant manager of the Bank of Beverly Hills in California and a senior official of a financial institution in Palermo to testify that my client had business operations and investment income through their institutions.  It was total over-kill at the time but the feds got their man.
If you buy the rental property, it is taxable in Italy first.  You will have to file a non-resident Italian tax return.  If there is a profit and you pay tax, you can claim it as a tax credit on your Canadian Return after filling in Canadian Form T776 to report the rental income to Canada.
If the property is going to lose money in the short term, you will need a very good cash flow projection showing an eventual rental profit (on an annual basis) to deduct any rental loss caused by interest under the rules of the new bulletin IT 533.
Under the new rules which are the same rules I lived with for 40 yeas only codified now, you cannot deduct interest against future capital gain profits.  The profit must come from operating income or investment income from the investment or project the original amount (which has generated the interest expense) was borrowed for.
It does not matter where you borrow the money as far a s tax laws go.  However, because of currency fluctuations, I recommend that you borrow as much as you can in Italy so that the Euros are paid back with Euros.  Of course, this will have been BAD advice if the EURO rises more against the Canadian Dollar.  In that case, you will have wished that you had borrowed the money in Canada.
Happy to look after your tax returns when you make your investment.
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non-contractual duties are expressly denied. All readers should obtain formal advice from a competent financial, or real estate planner or advisor & appropriately qualified legal practitioner, tax or immigration specialist in connection with personal or business affairs such as at
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