31 May 1994 External T.I. 9411865 - COST AMOUNT OF MUTUAL FUND TRUST UNITS

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.

Principal Issues:

Calculation of ACB of units in mutual fund trust.

Position TAKEN:

General info.

Reasons FOR POSITION TAKEN:

Routine - see 940359.

XXXXXXXXXX 941186

Attention: XXXXXXXXXX

May 31, 1994

Dear Sirs:

Re: Registered Retirement Savings Plans (RRSP's)
Calculation of Cost Amount of Mutual Fund Units

This is in reply to your facsimile of May 4, 1994, in which you ask us to clarify the calculation of book values associated with buying and selling mutual funds, and the effect of dividend re-investment. We assume you are referring to mutual fund trusts and determining the cost amount of units in such trusts.

"Cost amount" is defined in subsection 248(1) of the Income Tax Act (unless as otherwise stated all references to this statute are to the Income Tax Act S.C. 1970-71-72, c. 63 as amended, consolidated to June 10, 1993 - the "Act"). For capital properties, such as mutual fund units in an RRSP, the cost amount 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 are also determined under subsection 132.1(2) of the Act.

In accordance with section 47 of the Act, when an RRSP (or any investor) purchases new units, the costs of the new units and old units are aggregated and divided by the number of all the units, to arrive at a new ACB for each unit in the RRSP.

Where dividends are reinvested in units of the mutual 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). Their costs are then added to the costs of the class as a whole and a new unit cost determined as noted in the previous paragraph.

Please note also that 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.

Although the foregoing comments are not binding on the Department, we trust they are helpful.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate