3 May 2005 Roundtable, 2005-0116651C6 - Calu-Deductiblity of life 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: Is the condition in clause 20(1)(e.2)(i)(B) satisfied for a particular year if only part of the interest on the loan is deductible?

Position: Generally, YES

Reasons: Wording of 20(1)(e.2)(i)(B)

CALU - Conference for Advance Life Underwriting (2005)

Question 4

Deductibility of Life Insurance Premiums

A corporation borrows money from a restricted financial institution (as defined in subsection 248(1)), and uses the money to acquire a life annuity contract on the life of its sole shareholder. Payments under the annuity contract commence immediately. The amount of interest payable on the loan for each year exceeds the amount included in the corporation's income for the year under subsection 12.2(1) in respect of the annuity contract. Consequently, except in the taxation year in which the annuity contract is acquired, only a portion of the interest is deductible under paragraph 20(1)(c).

As a condition for the loan, the lender requires that the corporation purchase a term life insurance policy on the life of its shareholder and that this policy be assigned to the lender as collateral for the loan.

Question:

Can the corporation claim deductions under paragraph 20(1)(e.2) in respect of the life insurance premiums, subject to the limits in that paragraph? More specifically, is the condition in clause 20(1)(e.2)(i)(B) satisfied for a particular year if only part of the interest on the loan for the year is deductible?

Agency's Response

The premiums from a life insurance policy used to guarantee a loan may be deductible under paragraph 20(1)(e.2) of the Act if the interest payable on the loan is deductible in computing the income of the borrower in the year or would be deductible in the year but for subsections 18(2) and (3.1) and sections 21 and 28 of the Act.

Subparagraph 20(1)(c)(iv) of the Act permits a deduction for interest on money borrowed and used to acquire an interest in an annuity contract in respect of which section 12.2 of the Act applies (or would apply if the contract had an anniversary day in the year at a time when the taxpayer held the interest) except that, where the annuity payments have begun under the contract in a preceding taxation year, the amount of interest paid or payable in the year shall not be deducted to the extent that it exceeds the amount included under section 12.2 of the Act in computing the taxpayer's income for the year in respect of the taxpayer's interest in the contract.

As a result, a portion of the interest on money borrowed and used to acquire an interest in an annuity contract may be not deductible in the calculation of income of a taxpayer. However, in our view, the condition stated in clause 20(1)(e.2)(i)(B) of the Act is met for the taxation year if part or all of the interest is deductible in the year by virtue of subparagraph 20(1)(c)(iv) of the Act. If no interest is deductible in a taxation year, the condition is not met for that taxation year.

May 3, 2005