10 March 2009 External T.I. 2008-0303961E5 - Mortgages life insured by banks

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.

Principal Issues: Whether life insurance premiums paid by an individual are deductible in the calculation of taxable income.

Position: Question of fact.

Reasons: Whether all of the conditions of 20(1)(e.2) are satisfied is a question of fact to be determined in consideration of all pertinent information.

								2008-030396
XXXXXXXXXX 							Robert Demeter, CGA
(613) 952-1505
March 10, 2009

Dear XXXXXXXXXX :

Re: Deduction of premiums on life insurance used as collateral

We are writing in response to your recent request regarding the above-noted subject.

Facts:

You have requested our comments on a situation in which a taxpayer is required to maintain life insurance as part of a lending arrangement provided by a bank holding a mortgage on property owned by the taxpayer. The underlying property is a rental property that is held by the taxpayer for purposes of gaining or producing income from business or property.

You have asked whether the life insurance premiums paid by an individual are deductible in the calculation of taxable income of the individual for a taxation year.

Our comments:

Written confirmation of the tax consequences inherent in a particular transaction or series of 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 70-6R5. However, we are prepared to provide the following comments.

Generally, premiums paid under a life insurance policy are considered to be on account of capital, and are therefore not deductible pursuant to paragraph 18(1)(b) of the Income Tax Act (the "Act").

However, premiums payable by a taxpayer under a life insurance policy used as collateral for a loan may be deductible in the computation of a taxpayer's income from business or property where all of the conditions of paragraph 20(1)(e.2) of the Act are met. Whether the conditions described by paragraph 20(1)(e.2) are present in any particular situation is a question of fact that must be determined in consideration of all pertinent information.

Specifically, the deduction under paragraph 20(1)(e.2) may be available where:

• premiums are payable by a taxpayer under a life insurance policy that is assigned to a restricted financial institution in the course of a borrowing from that institution;
• the assignment of the life insurance policy is required by the financial institution as collateral for the borrowing; and,
• the interest payable in respect of the borrowing is otherwise deductible in computing the taxpayer's income for the year.

Where the above conditions are present, and subject to certain limitations imposed in relation to amounts owing under the borrowing, the deduction will be limited to the lesser of:

(a) the premiums payable under the policy in respect of the year; and,

(b) the net cost of pure insurance in respect of the year, in respect of the interest in the policy.

Interpretation Bulletin IT-309R2, Premiums on Life Insurance Used as Collateral, provides further discussion on the detailed conditions and restrictions relative to the amount deductible under paragraph 20(1)(e.2) of the Act..

We hope that our comments are of assistance to you.

We trust that these comments will be of assistance.

Yours truly,

F. Lee Workman
Manager
Charitable and Financial Institutions Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch