16 February 1994 External T.I. 9403595 - ACB OF MUTUAL FUND TRUST AND DEDUCTIBLE EXPENSES

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 Department.

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

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

DOCUMENT TYPE:

Opinion

Principal Issues:

1-3)Whether certain expenses are those of the RRSP trust or the annuitant, or should be added to the capital cost of the RRSP investments.

4)Whether cost of mutual fund units increased by dividends reinvested in units.

Position TAKEN:

1)Commissions relating to purchase of investments are capital expenses and added to acb of units purchased. (See Sheerin memo of Nov. 10/87 to Penticton DO and 9317251).

2)Fees for advice relating to purchase and sale of investments, and costs associated with management of investments are those of the owner of the investments i.e. the RRSP trust

3)Expenses relating to administration of the RRSP are deductible by annuitant when paid outside the RRSP.

4)Cost of reinvested units equal to cost of dividends and then added to cost of previously held units and cost averaged. (See 921049).

Reasons FOR POSITION TAKEN:

1)Acquisition costs of capital property form part of the cost.

2)20(1)(bb)

3)Position expressed in publications.

4)52(6) and 47.

LEGAL:

FINANCE OPINION:

JURISPRUDENCE:

RCT PUBLICATIONS:

IT-124R5, para.2; IT-238R2, para.7; pg.32 of 1993 RRSP Guide.

HAA NUMBER:

				7255-1

XXXXXXXXXX		940359

February 16, 1994

Dear XXXXXXXXXX:

This is in reply to your letter of August 19, 1993, which has been referred to us by the Ottawa District Office. We apologize for the delay in replying.

You ask whether the "front end load" which is charged when purchasing units in a mutual fund for your registered retirement savings plan (RRSP) must be paid with your RRSP contributions or paid by you outside the RRSP.

A "front end load" charge is an acquisition fee or commission; it is considered a capital expense and must be added to the "cost amount" (see below) of the units purchased.

You also ask whether the "cost amount" of the mutual fund units in an RRSP (for purposes of ensuring the "foreign property" restrictions of subsection 206(2) of the Act are met) includes the cost of reinvested dividends, or front end load charges, brokerage fees, trustee fees, or any other costs associated with the purchase of foreign mutual fund units.

"Cost amount" is defined in subsection 248(1) of the Act and for capital properties, such as mutual fund units in an RRSP, is the "adjusted cost base" ("ACB") of the property. The ACB of a capital property is defined in paragraph 54(a) of the Act to mean the cost of the property adjusted in accordance with section 53 of the Act. Enclosed are copies of Interpretation Bulletin IT-390 and its Special Release which discuss some of the adjustments to the cost base of interests in unit trusts; a mutual fund trust is a unit trust. By virtue of paragraph 53(1)(d.1) of the Act, additions to the cost of a mutual fund trust unit are also determined under subsection 132.1(2) of the Act.

With respect to your specific question, where dividends are reinvested in units of the fund, the new units have a cost equal to the amount of the dividends thus invested (see 2(b) and 4 of the Interpretation Bulletin). In accordance with section 47 of the Act, the costs of the new units and old units are then aggregated and divided by the number of all the units, to arrive at a new adjusted cost base for each unit in the RRSP.

As noted above, the acquisition costs ("front end load" charge, brokerage fees, other costs associated with the purchases of the units) are capital expenses and are added to the cost amount of the units purchased.

Expenses relating to investment advice and for services in respect of the administration or management of securities are deductible pursuant to paragraph 20(1)(bb) of the Income Tax Act (the "Act") to the taxpayer who has legal title of the investments and securities. In the case of investments purchased in or by an RRSP, the expense must be claimed by the RRSP trust which is the legal owner of the investments. Therefore, these expenses, if any, are properly charged to your RRSP.

Trustee fees or expenses relating to the administration of your RRSP are considered to be expenses of the annuitant and, if paid outside the RRSP, are deductible by you pursuant to section 9 of the Act.

We note your suggestion concerning the RRSP's and Other Registered Plans for Retirement Guide, and have sent a copy of your letter to the Client Assistance Directorate, the area responsible for preparation of the Guide.

Although these comments are not binding on the Department, we trust they answer your questions satisfactorily.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate

c.c. Ms Barb Stewart, PAO

Ottawa District Office

Mrs. H. Beauchemin, Director General

Client Assistance Directorate