14 May 1996 External T.I. 9613805 - COST AMOUNT FOREIGN PROPERTY

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: cost amount of debt instruments

Position:		routine

Reasons:		routine

XXXXXXXXXX 5-961380

Attention: XXXXXXXXXX

May 14, 1996

Dear Sirs:

Re: Foreign Content of deferred Income Plans

This is in reply to your facsimile of April 18, 1996 wherein you requested clarification of the valuation of property held in a deferred income plan for the purpose of applying the foreign content rules.

Part XI of the Income Tax Act (the "Act") levies a tax in respect of foreign property held by various pension trusts and corporations as described in paragraph 205(a) of the Act, trusts governed by RRSPs, DPSPs or RRIFs, and Registered Investments, all referred to as the "Plans" in the balance of this letter. The tax is based on the amount of the foreign property held by the Plans in excess of the limits specified in subsection 206(2) of the Act.

For the purpose of calculating this tax, the value of the property held by a Plan is measured by the property's "cost amount". This is a term defined in subsection 248(1) of the Act and may vary depending on the nature of the property. In most cases, however, the property held in these types of plans is non-depreciable capital property with a cost amount equal to its adjusted cost base (ACB) or it is a loan or lending asset, such as a bond, with a cost amount equal to the property's "amortized cost".

The term "ACB" is defined in the Act and is generally the actual cost of a property plus any brokerage fees or other costs incurred on the property's acquisition, together with such other amounts as may be required under the Act from time to time. In general these additional amounts can arise for a wide variety of reasons and can not be adequately discussed in this letter.

A debt's "amortized cost" is also defined in subsection 248(1) of the Act and basically means a debt's actual cost as long as the debt was acquired at its face amount.

As a general rule, a debt's amortized cost is not related to the amount of interest that must be accrued on the debt and it does not generally increase as such accruals are made. However, if a debt is purchased at a discount or premium, the determination of the debt's amortized cost will take the discount or premium into consideration as the discount or premium is included in the calculation of the plan's income. Reference should be made to the definition of amortized cost for more information on the calculations required.

With respect to this topic, we are also frequently asked about the calculation of the cost amount of units in a mutual fund trust. Because these units are generally held as capital property, changes in their market value do not affect the cost amount of units held by a plan. However, where income is distributed from these funds in the form of additional units, the additional units will increase the total number of units held in a plan and the total cost amount of the plan's holdings. Therefore, when reinvestments are made in funds that are classified as foreign property, the reinvestments can have an effect on the calculation of the excess foreign property holdings of the plan.

We trust these comments will be of assistance to you.

Yours truly,

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

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