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:
The deductibility of premiums under paragraph 20(1)(e.2) of the Income Tax Act as referred to in the questions referred to below.
Position:
See the questions and responses referred to below.
Reasons: IT-309R2
CALU - CONFERENCE FOR Advanced Life Underwriting (2006)
Question 1
Determination of Deductible Portion of Premium for a Life Insurance Policy Assigned as Collateral for a Loan
Where a taxpayer has assigned a life insurance policy as collateral for a loan, and the conditions of paragraph 20(1)(e.2) are satisfied, the taxpayer is permitted to claim a deduction each year in respect of premiums payable under the policy. The amount that may be deducted in a year is equal to that portion of the lesser of the premiums payable for the year and the net cost of pure insurance (NCPI) in respect of the year that "can reasonably be considered to relate to the amount owing from time to time during the year by the taxpayer".
Where a life insurance policy has a cash surrender value it is unclear how to determine the portion of the premiums or NCPI that is considered to relate to the amount owing.
Assume that paragraph 20(1)(e.2) is applicable with respect to a life insurance policy that has been assigned by a taxpayer as collateral for a loan. The relevant amounts for a particular taxation year are as follows:
Death benefit = $1,000,000
Cash surrender value = $ 300,000
Amount owing = $ 500,000
The net amount at risk is $700,000 ($1,000,000 - $300,000), which is the amount of insurance for which the NCPI is determined. Assume that the premiums payable by the taxpayer for the year exceed the NCPI for the year, so that the taxpayer's deduction under paragraph 20(1)(e.2) is based on the NCPI.
Questions:
(a) What is the CRA's view on how the taxpayer's deduction in the above example should be determined?
(b) If in the above example the premiums payable for the year were less than the NCPI for the year, would the taxpayer's deduction be determined in the same manner using the amount of the premiums instead of the NCPI?
Agency's Response
(a) To date, as evidenced by Interpretation Bulletin IT-309R2 - Premiums on Life Insurance Used as Collateral, the Agency has taken a rather simplistic approach in determining the amount of the premium deductible where a life insurance policy has been assigned as collateral for a loan under paragraph 20(1)(e.2). The premium deductible under paragraph 20(1)(e.2) is calculated with reference to the death benefit payable under the insurance policy and the outstanding amount of the loan without reference to other collateral or the cash surrender value of the policy.
As the death benefit in the example referred to above is $1,000,000 and the loan amount is $500,000 in accordance with the approach referred to in IT-309R2 the amount of the premium deductible under paragraph 20(1)(e.2) will be calculated as 50% of the NCPI, as it is assumed that the premiums payable by the taxpayer for the year exceed the NCPI for the year.
(b) Yes.
May 9, 2006
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