13 February 1997 External T.I. 9701705 - RRSP BROKERAGE FEES

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:

Whether annuitant can pay brokerage fees outside the RRSP which relate to shares purchased by the RRSP.

Position:

No. If annuitant pays the fees it is considered a contribution to the RRSP.

Reasons:

Brokerage fees are a cost of acquisition & are added to "cost amount" of securities purchased.

XXXXXXXXXX 970170

February 13, 1997

Dear XXXXXXXXXX:

Re: Brokerage Fess on Purchase of Shares in a Registered Retirement Savings Plan ("RRSP")

This is in reply to your facsimile transmission of January 21, 1997, in which you ask for our comments concerning the proper accounting for commissions on the purchase of shares in an RRSP governed by a trust ("RRSP trust"). You attached a letter from your broker which explains that it is Revenue Canada's position that transaction fees relating to securities inside an RRSP trust are properly charged to the RRSP and may not be paid outside the RRSP by the annuitant. You ask us to explain our position in particular with reference to brokerage fees or commissions paid on the purchase of shares.

A brokerage fee, commission or other expense relating to the acquisition of securities which are capital properties to the purchaser is considered a capital expense and must be added to the "cost amount" of the securities purchased. As you note, such expenses may not be deducted from income whether purchased inside or outside the RRSP.

To elaborate, in most cases property held in an RRSP trust is capital property and its cost amount is defined as its "adjusted cost base" to the RRSP at a particular time. The term "adjusted cost base" ("ACB") is also defined in the Act and can change over time. The ACB of a capital property at the time of purchase 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 its acquisition.

The determination of the cost amount of securities in an RRSP trust is relevant for purposes of subsection 206(2) of the Act which imposes a tax on excessive foreign property held in an RRSP trust. Generally, the tax is payable where, at the end of the month, the cost amount of "foreign property" (as defined in subsection 206(1) of the Act) held by the RRSP trust at month end exceeds 20% of the cost amount of all property held by it at that time.

Aside from subsection 206(2) of the Act, cost amount is also relevant to an RRSP trust if the plan is deregistered or becomes subject to tax pursuant to subsection 146(4) of the Act.

If deregistered the non-RRSP trust is subject to tax in accordance with sections 104 through 108 of the Act. Losses or gains on the disposition of capital properties can be taxed inside the trust or flowed through and taxed in the hands of the beneficiary.

If the RRSP trust is subject to tax pursuant to subsection 146(4) of the Act, dispositions by the RRSP trust of capital property will result in a capital gain or capital loss which will affect the calculation of its taxable income.

We trust the foregoing satisfactorily explains why brokerage fees must be accounted for within the RRSP trust with respect to securities purchased by the RRSP trust. Should an annuitant pay the brokerage fees outside the RRSP relating to a purchase of securities by the RRSP trust, the amount paid will be considered a contribution to the RRSP. A contribution is deductible to the extent permitted by subsection 146(5) of the Act and may cause a cumulative excess amount which is subject to tax in accordance with Part X.1 of the Act.

In your request you explained that you could purchase shares outside your RRSP and the brokerage fees would be added to the cost amount. You could then sell the shares to your RRSP at fair market value. On the assumption that the property is a "qualified investment" as defined in subsection 146(1) of the Act, we agree that an annuitant is entitled to dispose of his or her securities to an RRSP trust at fair market value and thus avoid the incurrence of brokerage fees which would arise in a direct purchase of the same securities by the RRSP trust. In our view, however, the fact that the brokerage fees on a share purchase are eliminated if an intervening purchase by the annuitant occurs does not alter the requirement under the Act to account for such a cost within the RRSP when instead the RRSP trust purchases the shares directly.

Although the foregoing comments are not binding on the Department, we trust they will be of assistance to you.

Yours truly,

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