29 June 2004 External T.I. 2004-0075331E5 - interest deduction; mortgage disability insurance

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 interest continues to be deductible where disability insurance is paid in respect of his mortgaged rental property

Position: no

Reasons: taxpayer no longer has to pay principal and interest since insurance company pays mortgagee bank; interest is not deductible unless paid or payable

XXXXXXXXXX 	2004-007533
		Denise Dalphy, LL.B.
(613) 941-1722
June 29, 2004

Dear XXXXXXXXXX:

We are writing in reply to your letter dated May 4, 2004 (and our telephone conversation) wherein you requested our views on interest deductibility where an insurance company makes payments under a life and disability insurance policy of a taxpayer who has rental properties, and has mortgages on those properties.

In particular, you have asked: "A client that has rental properties, and has mortgages on those properties, has recently become disabled. He fortunately had life & disability insurance on the mortgages. Since the insurance is covering the mortgage payments can he still deduct mortgage interest from his rental income?" You advised in our (XXXXXXXXXX/Dalphy) telephone conversation that it is your understanding that the taxpayer is an individual and that he likely deducts the insurance premiums in computing his income from property. It also seems that the bank that holds the mortgage on the property, and not the taxpayer, is the beneficiary of the insurance policy and that the bank, not the taxpayer, receives the funds from the insurance company. The taxpayer continues to generate rental income from the property.

Our Comments

Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are seriously proposed in the near future and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Notwithstanding the foregoing, we are providing the following general comments.

If the taxpayer no longer has to pay the bank in respect of the principal and interest in respect of his mortgage on the property, then, since interest would neither have been paid nor payable, no deduction in respect of interest would be available. While you posited that this would be unfair, since before the taxpayer became disabled the taxpayer would have received rental income of, for example, $100 and deducted interest paid of, for example, $10, the taxpayer would have been required to pay income tax on net income of $90.

We disagree that this result would be unfair. In the first place, the taxpayer continues to earn rental income, but he is no longer required to make any mortgage payments. This is a significant economic advantage for the taxpayer. Further, while we agree that a taxpayer who is no longer required to make mortgage payments on the property (as described in the example above) will be taxable on $100, not $90, of income, economically, the taxpayer is $10 (less income tax payable on $10) ahead.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate