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:
General enquiry concerning specified limit in regard to investments in foreign property held by a RRSP
Position TAKEN:
None. General comments provided
Reasons FOR POSITION TAKEN:
General comment.
XXXXXXXXXX 5-992464
P. Diguer CGA
September 29, 1999
Dear Sir\Madam
Re: Foreign property of a
Registered Retirement Savings Plan
This is in reply to your letter dated August 27, 1999, in which you request our views in regards to verifying the amount of foreign property held by a registered retirement savings plan trust ("RRSP") to determine whether the foreign property exceeds specified limits, consequently subjecting the RRSP to a special tax as described more fully hereunder.
In particular, you ask:
i) what amount should be allocated to a foreign property for purposes of the special tax; and
ii) what effect, if any, results from
a) a gain realized on the disposition of a foreign property held by the RRSP;
b) an increase in fair market value of a foreign property held by the RRSP;
c) a fluctuation in the fair market value of an investment property held by the RRSP; and
d) an individual's monthly contributions to his or her RRSP.
Written confirmation of the tax implications inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R3 dated December 30, 1996 ("IC-70-6R3") (copy enclosed). The Directorate also provides technical interpretations of the various provisions of the Act but we do not provide tax planning advice.
Briefly, the Income Tax Act (Canada) (the "Act") imposes a limit on how much foreign property can be held in an RRSP and applies a tax (the "Special Tax") to any excess holdings. The Act provides that an RRSP may be subject to a Special Tax if, at the end of any month, the amount of foreign property exceeds a specified limit. The limit is generally 20% of the "cost amount" of all property held in the RRSP but can be greater if certain types of property, referred to as "small business property", are held in the plan.
As stated in paragraph 1 of Interpretation Bulletin IT-412R2, Foreign Property of Registered Plans (copy enclosed), "cost amount" is defined in the Act. Generally, cost amount means a property's cost for tax purposes at a particular time. While there are exceptions, in most cases property held in an RRSP is capital property and its cost amount is defined as its "adjusted cost base" to the RRSP at that time. For purposes of the following discussion, all such capital property is presumed to be a "qualified investment" for an RRSP.
The term "adjusted cost base", or "ACB", is defined in the Act and can change over time. In general, however, the ACB of a capital property is equal to the actual amount laid out to acquire the property plus any brokerage fees or other costs incurred which are incidental to the acquisition. Using the example in your letter if, at the end of any month, the capital property in the RRSP has an aggregate ACB of $10,000, of which $2,000 represents the aggregate cost amount of the investment in foreign property, the RRSP would not be subject to the Special Tax.
Earnings on a particular property held in an RRSP that are in turn invested will generally increase the aggregate cost amount of property held by an RRSP, but will normally not change the cost amount of the particular property itself. For instance, where an RRSP holds units in a mutual fund trust, the cost amount of those units will normally not change as a result of earnings they generate. However, the earnings themselves will result in the acquisition by the RRSP of new property and it is for this reason that an RRSP may exceed the foreign content limit. For example, if the mutual fund trust issues new units in payment of dividends, the RRSP has acquired additional units which themselves will have a cost amount. Thus, the cost amount of the original units will not necessarily change as a result of the issuance of the additional units, but the total cost amount of the RRSP's property will increase because the RRSP has acquired additional units.
Similarly, gains on the disposition of a particular investment property held in an RRSP that are in turn invested will increase the aggregate cost amount of property held by an RRSP. The cost amount of the property sold will be eliminated and the cost amount of the new property will be added. Again, using the example in your letter, if foreign property held by an RRSP having an ACB of $2,000 is sold for proceeds of $2,500 (assume no other costs), the aggregate ACB of all property in the RRSP will increase by $500 (the gain) to $10,500. The RRSP may now hold up to $2,100 (20% of $10,500) in foreign property.
The Special Tax payable by an RRSP on excess foreign property holdings is calculated on the basis of the cost amount of the RRSP trust's property at the end of each month. Accordingly, a fluctuation in the fair market value of an investment property held by the RRSP will not by itself cause the Special Tax to be exigible.
As stated above the Special Tax is calculated on the basis of the cost amount of the RRSP's property at the end of each month. Accordingly, if an individual makes monthly contributions to their RRSP (which holds foreign properties) and the monies are used to acquire additional investment properties, the RRSP holder must take into account the cost amount of all property received by the RRSP as it is received or, at least, by the end of the month in which it is received.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Encl.
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