17 April 2000 External T.I. 2000-0019565 - RRSP IDENTICAL PROPERTIES 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: Will the payment of dividends by a mutual fund trust in the form of additional units of the mutual fund trust result in a change in the adjusted cost base of the units of the mutual fund trust?

Position: Usually.

Reasons: Where subsection 47(1) applies because of the acquisition of identical properties, the ACB of the identical properties will be averaged.

XXXXXXXXXX 2000-001956
M. P. Sarazin
April 17, 2000

Dear Sir\Madam:

Re: Foreign Property held by a Registered Retirement Savings Plan

This is to provide clarification with respect to the comments that we provided to you in our letter dated September 29, 1999 (file 5-992464) (the "Letter").

In our Letter, we stated that 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. This would be the case where an RRSP holds units in a mutual fund trust and the income paid to the RRSP in respect of those mutual fund trust units is reinvested by the RRSP in other property (other than additional units of the same mutual fund trust). However, the Letter discussed an example of where a mutual fund trust issues new units in payment of dividends and, as a consequence thereof, the RRSP acquires additional units of the particular mutual fund trust. We stated that the cost amount of the original units will not necessarily change as a result of the issuance of the additional units by the particular mutual fund trust. This statement is not correct. If the mutual fund trust issues identical property (i.e. new units) in payment of its dividends, the RRSP will acquire additional units the cost amount of which will probably cause a change to the cost amount of the original units because of the application of section 47 of the Act. Section 47 of the Act requires a taxpayer to average the cost of identical properties acquired after 1971. Consequently, when any investor (including an RRSP) acquires new units that are identical to units already held, the cost of the new units (see comment below) and the old units are aggregated and divided by the total number of all of the identical units to arrive at a new ACB for each of the identical units held by the investor.

Note that, where dividends are reinvested in units of the mutual fund trust, the new units have a cost equal to the amount of the dividends thus invested (see 2(b) and 4 of Interpretation Bulletin IT-390 - Unit Trusts - Cost of Rights and Adjustments to Cost Base). Copies of Information Circulars and Interpretation Bulletins referred to above and in the Letter are available from your local tax services office or on the internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

We trust that our Letter and the above comments will be of assistance.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate