25 October 1993 External T.I. 9327145 F - Foreign Property Limit in RRSP

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.

XXXXXXXXXX 

Attention:  XXXXXXXXXX

Dear Sir/Madam:

This is in reply to your letter of September 14, 1993 and further to our letter of June 17, 1993 concerning the foreign content rules in section 206 of the Income Tax Act (the "Act").

You mention that trustees of self-directed registered retirement savings plans ("RRSP") generally measure foreign content based on book value. Dividends earned in the security are then added to this book value and the foreign content is then measured using this, in your words, "modified book value". It is your view that foreign content should be measured using the original book value rather than the modified book value. You thus ask for a definition of "book value" and how subsequent dividends, etc. earned by the investment would be treated.

Our Comments:

As explained in our letter of September 14, 1993, the Income Tax Act (the "Act") provides that the percentage of an RRSP's property consisting of foreign property is measured using the "cost amount" of the properties held by the RRSP. The term "cost amount" is defined in subsection 248(1) of the Act and generally will be equal to the original cost of the property. The Act does not contain a definition of "book value" and we are therefore not able to provide you with a definition of that term. However, since any foreign content penalty would be determined based on the cost amount of the RRSP's property, we presume that when trustees use the term "book value" in measuring foreign content, they are in fact using a value equal to the cost amount of the property. Otherwise, they could inadvertently cause the RRSP to be subject to a foreign content penalty.

Earnings on a particular property will generally increase the cost amount of all the property held by an RRSP, but will normally not change the cost amount of the particular property itself. For instance, where an RRSP holds units in a mutual fund trust, the cost amount of those units will normally not change as a result of earnings they generate. However, the earnings themselves will result in the acquisition by the RRSP of new property and it is for this reason that an RRSP may exceed the foreign content limit. For example, if the mutual fund trust issues new units in payment of dividends, the RRSP has acquired additional units which themselves will have a cost amount. Thus, the cost amount of the original units will not necessarily change as a result of the issuance of the additional units, but the total cost amount of the RRSP's property will increase because the RRSP has acquired additional units. As you indicate in your letter, where the original units are foreign property, the additional units acquired with the dividend payment could put the RRSP over the 18% (20% in 1994) foreign content limit. On the other hand, if the original units were other than foreign property, the additional units acquired with the dividend payment could produce a favourable result in that it could put onside an RRSP that had otherwise exceeded its foreign content limit. Our comments are an expression of opinion only and are not binding on the Department as explained in paragraph 21 of Information Circular 70- 6R2. We trust, however, that they are of assistance.

Yours truly,

for DirectorFinancial Industries DivisionRulings DirectorateHAA 7234-1