25 January 2002 External T.I. 2002-0117645 - UNIT TRUST CAPITAL DISTRIBUTION ACB

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Will capital distributions by a unit trust reduce the adjusted cost base of the units of the trust?

2. Will a capital distribution by a unit trust affect the foreign content limits imposed under Part XI of the Act?

3. Will the transfer of property from a RRSP to a RRIF result in the property being transferred at cost or fair market value?

Position:

1. Probably yes.

2. Yes.

3. Generally cost.

Reasons:

1. See subparagraph 53(2)(h)(i.1) and IT-456R.

2. A reduction in the ACB would result in a reduction in the cost amount used to compute Part XI taxes under subsection 206(2) of the Act.

3. This results from the amendments made to the definition of disposition in subsection 248(1) and the inclusion of subsections 107.4(1) and 248(25.1) in June 2000.

XXXXXXXXXX 2002-011764
M. P. Sarazin, CA
January 25, 2002

Dear XXXXXXXXXX:

Re: Adjusted Cost Base Calculations for Purposes of the Income Tax Act (the "Act")

This is in reply to your electronic message of January 10, 2002, wherein you requested our views regarding several questions dealing with the computation of the adjusted cost base of a unit of a trust.

Question 1

How is the adjusted cost base of a unit of a unit trust computed for purposes of the Act?

Response

Pursuant to subsection 248(1) of the Act, the expression "adjusted cost base" has the meaning assigned by section 54 of the Act. The expression "adjusted cost base" is defined in section 54 of the Act to generally mean

(a) where the property is depreciable property of the taxpayer, the capital cost to the taxpayer of the property as of that time, and

(b) in any other case, the cost to the taxpayer of the property adjusted, as of that time, in accordance with section 53 of the Act.

The Canada Customs and Revenue Agency ("CCRA") has provided general comments regarding the computation of the adjusted cost base of units of a unit trust in Interpretation Bulletin IT-390 entitled Unit trusts - Cost of rights and adjustments to cost base and Interpretation Bulletin IT-456R entitled Capital property - Some adjustments to cost base.

Question 2

Where a unit trust has made distributions of capital to the holders of its units, will the capital distribution affect the adjusted cost base of the units of the trust?

Position

Paragraph 13 of IT-456R states that, in computing the adjusted cost base of a capital interest of a taxpayer in a trust, the taxpayer shall deduct under subparagraph 53(2)(h)(i.1) of the Act any amount paid to the taxpayer by the trust after 1987 and before the time of the computation as a distribution or payment of capital by the trust. You will note that paragraph 13 also discusses certain exceptions to this rule.

Question 3

What are the tax consequences of the disposition of units of any unit trusts?

Response

The determination of whether the disposition of units would be taxed as an income gain or as a capital gain is a question of fact. In this regard, we would refer you to Interpretation Bulletin IT-479R entitled Transactions in securities. Paragraphs 9 to 32 of IT-479R provide CCRA's general views regarding the determination of whether dispositions should be taxed as an income gain or as a capital gain. For additional information on the taxation of capital gains, you should refer to the CCRA Capital Gains Guide (T4037E) which is available on our internet site at http://www.ccra-adrc.gc.ca/E/pub/tg/t4035eq/t4037eq-01.html.

Question 4

Would a capital distribution by a unit trust to the holders of the units of the trust affect the foreign content requirements under Part XI of the Act?

Response

CCRA's general views regarding the foreign property limitations that are applicable to registered plans are found in IT-412R2 entitled Foreign property of registered plans. Even though IT-412R2 does not reflect the recent foreign content increase to 30%, it does provide insights in how the foreign content rules apply to registered plans. Subsection 206(2) of the Act provides that, where at the end of any month after 2000 the total cost amount of foreign property exceeds generally 30% of the cost amount of all property held at that time, the taxpayer is subject to a tax of 1% of the lesser of the excess and the total of the cost amounts of all foreign properties acquired after June 18, 1971. We note that "cost amount" is defined in subsection 248(1) of the Act and, in the case of capital property, it is the adjusted cost base of the property.

Where a registered plan owns a unit in a unit trust and it receives a capital distribution from the unit trust, the capital distribution could affect the adjusted cost base of the unit and any adjustment to the adjusted cost base could result in the application of Part XI of the Act.

Question 5

When all of the property in an annuitant's registered retirement savings plan ("RRSP") is transferred to the annuitant's registered retirement income fund ("RRIF"), will the property be transferred at its fair market value or at its cost amount?

Position

Transfers that occur after 1999 are generally at the adjusted cost base of the property held in the RRSP. This conclusion is based on the June 30, 2000 amendments to the Act. Under paragraph (c) of the definition of "disposition" in subsection 248(1) of the Act, any transfer of property to a trust will be a disposition unless it meets one of the exceptions described in (f), (g) or (k) of the definition. Where the conditions described in paragraph (g) of the definition of "disposition" are satisfied, there will not be a disposition of property as a result of a transfer of property from an RRSP to a RRIF. We note that the exception in paragraph (g) only applies to transfers of property that occur after 1999. Where paragraph (g) applies, the transfer will take place on a rollover basis (i.e. at the adjusted cost base of the property). If paragraph (g) does not apply, the transfer will be a "qualifying disposition" if the conditions of subsection 107.4(1) are satisfied. Where this is the case, the subparagraph 107.4(3)(c)(iv) will apply to have the transfer occur on a rollover basis unless subparagraph 107.4(3)(c)(ii) applies.

We trust these comments will be of assistance. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4 entitled Advance Income Tax Rulings, dated January 29, 2001. Copies of Interpretation Bulletins and Information Circulars may be obtained on the Internet at http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate