8 May 2012 Roundtable, 2012-0435671C6 - 2012 CALU CRA Roundtable - Question 8

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: Where there is no benefit on death in respect of an interest in a life insurance policy at the end of the year (as a result of a payment of the benefit on death during the year), the NCPI would be nil, resulting in no deduction available under paragraph 20(1)(e.2). Would the CRA extend administrative relief to allow a deduction for the premiums paid during the year in this circumstance?

Position: No.

Reasons: Matter should be referred to the Department of Finance to consider possible legislative changes.

CALU CRA Roundtable – May 2012

Question 8 - Net Cost of Pure Insurance and Paragraph 20(1)(e.2)

Where a taxpayer has assigned a life insurance policy (other than an annuity contract) as collateral for a loan, and the conditions of paragraph 20(1)(e.2) of the Income Tax Act (the “Act”) are satisfied, the taxpayer is permitted to claim a deduction each year in respect of premiums payable under the policy. The deduction is limited 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”.

Section 308 of the Income Tax Regulations (the “Regulations”) sets out the definition of NCPI for purposes of subparagraph 20(1)(e.2)(ii) and paragraph (a) of the description of L in the definition of “adjusted cost basis” (“ACB”) in subsection 148(9) of the Act. To simplify this definition, the NCPI for a year in respect of a taxpayer’s interest in a life insurance policy is a formula consisting of an amount representing a prescribed cost of insurance multiplied by the amount by which the benefit on death in respect of the taxpayer’s interest in the policy at the end of the year exceeds the accumulating fund or cash surrender value (depending on the method regularly followed by the life insurer) of that interest at the end of the year.

The 1991 Department of Finance Technical Notes to paragraph 20(1)(e.2) of the Act indicate that,

Where a taxpayer’s taxation year does not correspond to the policy year, the premiums payable under the policy should be prorated on a reasonable basis to the taxation year. Similarly, the NCPI, which is determined by the insurer on a calendar year basis should be prorated on a reasonable basis to the taxation year.

Question

Assume a policyholder dies on December 1 and the conditions of paragraph 20(1)(e.2) of the Act were met prior to the time of death. It would appear that the formula in section 308 of the Regulations would determine the NCPI to be nil for the year as there is no benefit on death in respect of the policyholder’s interest at the end of the year, with the result that no amount would be deductible in respect of premiums that would have otherwise been deductible (i.e., premiums that reasonably relate to the period January 1 to November 30). This appears to contradict the 1991 Department of Finance Technical Notes which permit proration of premiums and NCPI amounts to determine the amount “that can reasonably be considered to relate to the amount owing from time to time during the year by the taxpayer” (i.e., for period preceding death).

Is the CRA prepared to provide administrative relief in this circumstance?

CRA Response

For the purposes of subparagraph 20(1)(e.2)(ii) and paragraph (a) of the description of L in the definition of ACB in subsection 148(9) of the Act, the NCPI for a year in respect of a taxpayer’s interest in a life insurance policy is computed under section 308 of the Regulations by reference to the benefit on death in respect of the taxpayer's interest at the end of the year. Since the NCPI is determined by the insurer on a calendar year basis, it is our general position as stated in paragraph 2 of Interpretation Bulletin IT-309R2, Premiums on life insurance used as collateral, that where the taxpayer’s taxation year end does not correspond to the calendar year, the premiums payable under the policy should be prorated on a reasonable basis to the taxation year.

In the circumstance described, there is no benefit on death in respect of the taxpayer’s interest at the end of the year. The result is that there is no NCPI, notwithstanding that premiums may have been payable on the policy during the period prior to death. It is our view that a legislative amendment would be required to provide for a deduction in respect of premiums relating to the period prior to death. A request for such an amendment would need to be made to the Department of Finance.

Prepared By: Bob Naufal
May 8, 2012
2012-043567