12 October 1994 Internal T.I. 9425396 - DEDUCTION LIMITS AND FOREIGN PROPERTY RULES FOR AN 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.

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:

Deduction limits and foreign property rules for an RRSP

Position TAKEN:

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Reasons FOR POSITION TAKEN:

Minister's Mail- just explaining law to taxpayer

				October 12, 1994

	Head Office	Head Office
	Client Assistance Directorate	Rulings Directorate
	Correspondence Section	(613) 957-8953

	Attention:  Paul Emberley
			5-942539

Minister's Mail Insert

This is in reply to your Memorandum of October 4, 1994 requesting that we review a draft letter for technical accuracy regarding the deduction limits and foreign property rules with respect to RRSPs. Attached are our comments with regards to the taxpayer's letter in the form of a draft letter.

If you have any questions regarding this matter please contact us.

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable David Anderson, Minister of National Revenue, has asked me to respond to a letter received September 23, 1994, from the Honourable Christine Stewart, Secretary of State, concerning registered retirement savings plans (RRSPs).

A tax deduction for contributions to your RRSP and to your spouse's RRSP is permitted within the limits set out in subsections 146(5) and (5.1) of the Income Tax Act (the "Act"). Pursuant to these subsections, a taxpayer may deduct in a particular taxation the lesser of:

1.any premiums paid into the RRSP under which the taxpayer or his spouse is the annuitant, in the taxation year or the first 60 days of the subsequent taxation year, provided these premiums have not previously been deducted, and

2.the taxpayer's RRSP deduction limit for the year.

Beginning with the 1991 taxation year, the RRSP deduction limit is equal to:

A)any unused RRSP deduction room at the end of the immediately preceding taxation year (for taxation years ending prior to 1991 this amount is nil)

plus

B) the lesser of

1.the dollar limit of the particular taxation year ($11,500 for 1990, $12,500 for 1991 and 1992, $13,500 for 1993, $14,500 for 1994) and

2. 18% of your "earned income" of the immediately preceding taxation year minus the pension adjustment (PA) for the immediately preceding taxation year
minus

C)any past service pension adjustment (PSPA) for the year

"Earned income" is defined in paragraph 146(1) of the Act and refers generally to employment and business income earned in a period throughout which an individual was resident in Canada, and employment and business income earned in Canada while the individual was a non-resident.

You may use income from any source to make contributions to your RRSP as the limit is based on earned income of the prior year. In other words, you may deduct in any given year an amount up to your RRSP deduction limit for the year regardless of the source of income used to make contributions to the plan.

Pursuant to subsection 206(2) of the Act a special tax on foreign property is levied against the trust governed by the RRSP. It is the property in each trust which is subject to the foreign property limits and not the cumulative property held in the RRSP trusts of one annuitant. An annuitant may not, therefore, measure the total of all foreign property against the total of all property held in all the RRSPs of which he or she is the annuitant. Even where there are two or more trusts with the same trustee and annuitant, each trust retains its separate identity for purposes of the RRSP rules. The tax is payable where, at the end of the month, the cost amount of foreign property held by the RRSP trust at month-end exceeds a particular percentage of the cost amount of all property held by it at that time. The percentage of property for months in 1993 was 18% and for months ending in 1994 is 20% and applies to an RRSP regardless of when the plan was registered.

To measure the amount of property in a plan, the Act uses each property's "cost amount" which is a defined term in the Act and in general refers to a property's cost for tax purposes at a particular time. While there are some exceptions, in most cases property held in an RRSP is capital property and its cost amount is defined as its "adjusted cost base" to the RRSP at that time.

The term "adjusted cost base", or "ACB", is also defined in the Act and can change over time. The ACB of a capital property is generally equal to the actual amount laid out to acquire the property plus any brokerage fees or other costs incurred which are incidental to the acquisition. However when calculating the ACB of identical properties an averaging formula must be used to determine the ACB of the units held at any particular time. It should also be noted that certain additional amounts can be added to the ACB of mutual fund units.

Changes in the market value of units of a fund do not affect the calculation of the property's cost amount. However, where income of a fund is distributed in the form of additional units, the reinvestment will increase the cost amount of the RRSP's investment in that particular fund and in the overall cost amount of all of the property held by the RRSP. The increase will be equal to the value of the additional units received and this will normally be equal to the amount of the fund's income distributed in the form of new units. When reinvestments are made in foreign funds they can have an effect on the calculation of the tax on excess foreign holdings.

I would add that guaranteed investment certificates are included in the definition of qualified investments for self-directed RRSPs and therefore must be considered in the calculation of the foreign property limit.

With respect to the recording of cost amounts when an RRSP is transferred from one trustee to another, the Department has taken the position that the transfer does not constitute a disposition or acquisition of the property held in the trust. Accordingly, the property must continue to be recorded at its cost amount as determined immediately before the transfer. Please note however that this position does not apply where only a portion of the assets are transferred from one RRSP to another or between RRSPs held by the same trustee.

I would like to thank you for writing. Should you have any further comments, please do not hesitate to contact me.

				Yours sincerely,