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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
In order to deduct an amount in respect of the premium on a life insurance policy provided as collateral for a loan must the loan be owing to the financial institution from whom the money was originally borrowed.
Position: Yes.
Reasons: Legislation
XXXXXXXXXX 2002-016708
K. Cooper, LL.B.
January 14, 2003
Dear XXXXXXXXXX:
Re. Deductibility of Premiums for Life Insurance used as Collateral
This is in reply to your letter dated October 2, 2002 in which you requested our comments with respect to the interpretation of paragraph 20(1)(e.2) of the Income Tax Act (the "Act") in particular circumstances.
The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments which may be of assistance.
It is a question of fact whether or not a taxpayer will be able to deduct an amount pursuant to paragraph 20(1)(e.2) of the Act in respect of premiums relating to a particular life insurance policy since one must determine whether or not all the conditions set out in that paragraph have been met. You have indicated in your letter that the requirements in clauses 20(1)(e.2)(i)(A), (B), and (C) have been met: the life insurance policy has been assigned to a restricted financial institution in the course of borrowing from the institution, the interest payable in respect of the borrowing would be deductible, and the assignment is required by the financial institution as collateral for the borrowing. However, the financial institution has assigned its rights under the original loan agreement to a securitization vehicle for financial consideration and the borrower may or may not have been informed of the transaction. The questions which you raise are whether in this fact situation the premiums continue to be deductible under paragraph 20(1)(e.2) following the securitization transaction and what obligation does the Act impose upon the borrower/taxpayer to inform themselves with respect to such transactions.
At issue in determining the continued deductibility of the premiums is the postamble to paragraph 20(1)(e.2) of the Act which requires that the amount to be deducted reasonably "relate to the amount owing from time to time during the year by the taxpayer to the institution under the borrowing." It is our view that the appropriate interpretation of paragraph 20(1)(e.2) is that the institution to which the amount must be owing is the original financial institution referred to in clause 20(1)(e.2)(i)(A) and that the borrowing referred to in the postamble is also the same as that referred to in clause 20(1)(e.2)(i)(A). As such, in order for the premiums to continue to be deductible pursuant to paragraph 20(1)(e.2) of the Act after the securitization transaction, there must continue to be an amount owing by the taxpayer to the original financial institution under the original borrowing. Since securitization transactions may take many different forms and structures, it will always be a question of fact whether a particular securitization transaction has resulted in an amount no longer being owed by the taxpayer to the original financial institution under the original borrowing and, as indicated above, we cannot comment with respect to a particular securitization transaction other than in the form of an Advance Income Tax Ruling.
As indicated above, in order for a taxpayer to claim a deduction under paragraph 20(1)(e.2) of the Act he/she must ensure that all of the specific requirements of the provision are met, including the postamble. Accordingly, the taxpayer must make sufficient enquiries to ensure that where life insurance is used as collateral for a loan that the amount borrowed continues to be owed under the original borrowing to the original financial institution.
Should you wish to pursue the basis for the requirement set out in the postamble to paragraph 20(1)(e.2) of the Act, we suggest that you contact the Tax Policy Branch of the Department of Finance, who are responsible for tax policy, by writing to L'Esplanade Laurier, 140 O'Connor Street, Ottawa ON K1A 0G5.
We hope that our comments will be of assistance.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings
Policy and Legislation Branch
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