5 June 1998 External T.I. 9812055 - 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: What is the cost amount for the foreign property rules?

Position: acb

Reasons: The Act is clear

XXXXXXXXXX 									981205
M. P. Sarazin

June 5, 1998

Dear Sir:

Re: RRSP - Foreign Content

This is in reply to your facsimile dated March 16, 1998, wherein you requested some clarification regarding the “book value” of property held in your registered retirement savings plan (“RRSP”) and the general application of Part XI of the Income Tax Act (the “Act”).

Comments

The enclosed Interpretation Bulletin IT-412R2 provides the Department’s general views regarding the application of Part XI (sections 206 and 207) of the Act. In this regard, we refer you to paragraph 1 of IT-412R2 wherein it is stated that “subsection 206(2) provides that where at the end of any month after 1993 the total of the cost amount (emphasis added) of foreign property exceeds generally 20% of the cost amount of all of the property held at that time, the corporation or the trust is subject to a 1% tax ...”.

The expression “cost amount” is defined in subsection 248(1) of the Act and, generally, it 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 the cost amount of capital property is defined as its “adjusted cost base” at that time.

The expression “adjusted cost base” is also defined in the Act and it can change over time. The adjusted cost base 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 its acquisition. The determination of whether certain additional costs associated with the acquisition of a mutual fund unit would be included in the computation of a unit’s cost amount is a question of fact. We note that where units of a particular mutual fund are acquired at different times, the identical properties provisions of section 47 of the Act apply in determining the adjusted cost base of a particular unit. The enclosed Interpretation Bulletin IT-387R2 provides the Department’s general views regarding identical properties.

Changes in the market value of units of a mutual fund will not affect the calculation of each unit’s cost amount. However, where income of a mutual fund is distributed in the form of additional units of the mutual fund, the receipt of the additional units of the mutual fund will affect the cost amount of the units of the particular mutual fund held by an RRSP and the aggregate cost amount of all of the property held by the RRSP. In this regard, we would refer to the above comments on the adjusted cost base of identical properties.

We also note that foreign mutual funds may distribute its income (e.g. dividends and interest) in a foreign currency. Even though foreign currency is not a qualified investment that may be held by an RRSP, the Department does not consider the RRSP to have acquired a non-qualified investment where the foreign currency is converted to an otherwise qualified investment within a reasonable time (for example, one month). However, the foreign currency would be foreign property for the purposes of computing the Part XI taxes applicable at the end of the particular month.

We trust the above general comments will be of assistance to you.

Yours truly,

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