25 August 1994 External T.I. 9418875 - COST AMOUNT OF RRSP 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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

What is cost amount of property for purposes of subsection 206(2)

Position TAKEN:

Routine reply

Reasons FOR POSITION:
		Routine application of law

XXXXXXXXXX 5-941887

Attention: XXXXXXXXXX

August 25, 1994

Dear Sirs:

Re: Determination of Cost Amount of Property held in Registered Retirement Savings Plans ("RRSPs")

This is in reply to your submission of July 22, 1994, requesting clarification of how to calculate the cost amount of foreign and Canadian fund property held in an RRSP for purposes of calculating the Part XI tax on excess foreign property.

As you are aware, the Income Tax Act (the "Act") imposes a limit on how much foreign property can be held in an RRSP and applies a tax to any excess holdings. The limit is generally 20% of the 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.

To measure the amount of property in a plan, the Act uses each property's "cost amount" and limits the RRSP's total foreign holding cost amount to a percentage of the total cost amount of all of the RRSP's holdings. A property's "cost amount" is similar to its "book value" for accounting purposes but may not be the same in every case. Cost Amount is a term defined in the Act and in general refers to 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.

The term "adjusted cost base", or "ACB", is also defined in the Act and can change over time. The ACB 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 the acquisition. However when calculating the ACB of identical properties an averaging formula must also be used to determine the ACB of the units held at any particular time. Enclosed are copies of the Departments Interpretation Bulletins IT-78, IT-390 and a special release to IT390. These discuss some of the adjustments required in calculating the ACB of units in a unit fund trust. It should also be noted that pursuant to paragraph 53(1)(d.1) and subsection 132.1(2) of the Income Tax Act additional amounts can be added to the ACB of unit fund units when certain elections are made by the fund.

Changes in the market value of units of a fund do not effect the calculation of the property's cost amount. However, where income of a fund is distributed in the form of additional units, the reinvestment will increase the cost amount of the RRSP's investment in that particular fund and in the overall cost amount of all of the property held by the RRSP. The increase will be equal to the value of the additional units received and this will normally be equal to the amount of the fund's income distributed in the form of new units. When reinvestments are made in foreign funds they can have an effect on the calculation of the Part XI tax on excess foreign holdings.

The above comments are based on our understanding of the law as it applies in general and may or may not apply to the circumstances of a particular case. They do not form an advance income tax ruling and they are not binding on the Department.

Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch

??