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 cost of mutual fund units increased by dividends reinvested in units.
Position: Cost of reinvested units equal to cost of dividends.
Reasons: 52(6) Wording of the Act and previous positions.
XXXXXXXXXX 5-980628
Fouad Daaboul
June 8, 1998
Dear Madam:
Re: Foreign content in RRSPs
We are writing in response to your letter of March 8, 1998, wherein you requested whether earnings from a mutual fund trust that is foreign property (the “MFT”) governed by an RRSP can be reinvested in the MFT without incurring the Part XI tax.
Pursuant to subsection 206(2) of the Income Tax Act (the "Act"), a taxpayer as defined under section 205 of the Act and including a trust governed by RRSP or RRIF that holds foreign property in excess of its foreign property limit of 20% of the cost amount of all property of the taxpayer is required to pay a Part XI tax.
Where earnings from the MFT are reinvested in units of the MFT, the new units have a cost equal to the amount of the distribution so reinvested. In this case, the "cost amount" of the MFT units in an RRSP (for purposes of ensuring the "foreign property" restrictions of subsection 206(2) of the Act are met) includes the cost of reinvested dividends.
Essentially the distributed earnings are used to buy additional units of the MFT, which is foreign property, and may thereby result in a situation where the 20% foreign property limit in the RRSP is exceeded.
Although these comments are not binding on the Department, we trust they answer your question satisfactorily.
Yours truly,
Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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