13 April 1995 Internal T.I. 9509976 - RRSPS AND FOREIGN PROPERTY LIMITS

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:

	RRSPs and foreign property limits; calculation of cost 	base

Position TAKEN:

Explained general position

Reasons FOR POSITION TAKEN:

Ministers Mail requesting general information on RRSP and ACB in particular to mutual funds

			April 13, 1995

	HEADQUARTERS	HEADQUARTERS
	Ministers Mail Assessing	M.P. Baldwin
	Attention:  Gerry Bursey
			7-950997

RRSPs and Foreign Property Limits

This is in reply to your facsimile of April 11, 1995 in which you would like us to reply to Question #1 in the Ministers Mail letter attached. The question and our draft reply are as follows:

QUESTION

If a person buys $800 worth of Canadian eligible mutual funds and $200 worth of foreign based funds and the foreign funds appreciate to a value of $220 while the Canadian funds remain at the $800 value, is it necessary to re-balance the account to restore the 80% Canadian content amount or does the 80/20 value of the original purchase price govern

ANSWER

Pursuant to subsection 206(2) of the Income Tax Act (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 20% of the cost amount of all property held by it at that time.

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.

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

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch