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 there any impact on the adjusted cost basis of a policyholder's interest in a life insurance policy in circumstances where non-deductible interest on a policy loan is paid with a new policy loan?
Position: No.
Reasons: Legislation
XXXXXXXXXX 2008-026430
Helen Zelobowski
(519) 571-6987
March 2, 2009
Dear XXXXXXXXXX :
Re: Capitalization of Policy Loan Interest
We are writing in response to your e-mail dated December 20, 2007 requesting confirmation that there is no impact on the adjusted cost basis (the "ACB") of a policyholder's interest in a life insurance policy in circumstances where non-deductible interest on a policy loan made in accordance with the terms and conditions of the policy is paid by way of an additional policy loan to the policyholder.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
Where the interest on a policy loan is satisfied by the insurer issuing a new policy loan equal to the amount of the interest, if the interest is not deductible by the policyholder under paragraphs 20(1)(c) or (d) of the Income Tax Act (the "Act"), this interest represents a premium under the policy as described in paragraph (a) of the definition of "premium" in subsection 148(9) of the Act.
Pursuant to paragraph (b) of the definition of "disposition" in subsection 148(9), a policy loan constitutes a disposition of an interest in a life insurance policy. However, the proceeds of the disposition in respect of the policy loan under subparagraph (b)(i) of the definition of "proceeds of the disposition" in subsection 148(9) do not include the amount of the loan that is used to pay a premium under the policy.
The ACB of a policyholder's interest in a life insurance policy is determined by a formula in subsection 148(9). Component "H" of this formula picks up the proceeds of the disposition of the policyholder's interest in the policy. As the proceeds of the disposition in respect of a policy loan do not include the amount of the loan applied to pay a premium, such amount does not impact the ACB of the interest in the policy. Component "B" of the formula picks up amounts paid in respect of a premium under the policy, other than certain specified amounts including those referred to in subparagraph (b)(i) of the definition of "proceeds of the disposition". The amounts in respect of a premium referred to in this subparagraph are those premiums that were paid by the application of amounts of a policy loan. Accordingly, the amount of the interest that is paid with the new policy loan, which is treated as a premium pursuant to paragraph (a) of that definition in subsection 148(9), is not included in component "B" of the formula.
The result is that there is no income inclusion by the policyholder and no impact on the ACB of the policyholder's interest in the policy in circumstances where non-deductible interest on a policy loan made in accordance with the terms and conditions of the policy is satisfied by way of an additional policy loan to the policyholder.
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
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