20 May 1997 External T.I. 9707405 - COST AMOUNT

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:

We were asked to provide an explanation of how the "cost amount" of property held in an RRSP trust is calculated.

Position:

We provided a general explanation of the calculation.

Reasons:

The answer was developed in prior correspondence.

	                          	970740
XXXXXXXXXX                          Wayne C. Harding

May 20, 1997

Dear Sir:

Re: Determination of Cost Amount of Property held by Registered Retirement Savings Plans (RRSP)

This is in reply to your letter of March 13, 1997, concerning the meaning of the term "cost amount" as used in respect of property held in trusts governed by RRSPs.

Property acquired by an RRSP trust must be recorded at its "cost amount" for the purpose of calculating Part XI tax. The term "cost amount" is defined in subsection 248(1) of the Act and for property held in RRSPs, means the property's adjusted cost base where the property is non-depreciable capital property and the property's amortized cost where the property is a loan or lending asset. The definition of "cost amount" also refers to several other classes of property. However, these are not generally held by RRSPs and are not discussed here.

The term "amortized cost" is defined in subsection 248(1) of the Act and in respect to a loan or lending asset generally means, at any particular time, the actual amount of the loan or lending asset and any costs of acquiring the property, plus or minus the amount of any discount or premium, if any, that must be taken into account in computing income for income tax purposes for each year ending before that time, less any payments received in satisfaction of the principal amount of the property. For example, a stripped bond is an investment contract and a "prescribed debt obligation" (P.D.O.) by virtue of paragraphs 12(11) of the Act and 7000(1)(b) of the Income Tax Regulations (the "Regulations") respectively. An amount determined pursuant to paragraph 7000(2)(b) of the Regulations is deemed to be interest on the P.D.O. and the interest thereon must be accrued and included in income over the period of ownership of the P.D.O. in accordance with subsection 12(4) and 12(9) of the Act. Hence, the total amount included in income to the maturity of the P.D.O. should equal the discount. The amount so included in income each year for the purposes of subsection 12(9) of the Act is added in computing the cost amount to the investor of that P.D.O..

In summation, because the term "cost amount" is very broad in its application, it is difficult to provide meaningful comments that will be of general application. However, if you require additional information with respect to a specific form of RRSP holding, we would be pleased to provide you with our comments.

Yours truly,

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