7 October 2022 APFF Financial Strategies and Instruments Roundtable Q. 6, 2022-0936311C6 F - Illness insurance policy used as collateral

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18(1)(b), 20(1)(e.1)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: Whether premiums paid by a corporation for a critical illness insurance policy used as collateral for a loan for the purpose of earning income from business or property are deductible.

Position: No.

Reasons: According to the law and previous positions.

FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 7 OCTOBER 2022
2022 APFF CONFERENCE

6. Deductibility of premiums on critical illness insurance policy assigned as security for a loan to earn property or business income

A corporation holds a critical illness insurance policy ("CII policy") that it purchased for its sole shareholder. This policy was assigned as security at the request of the lender (by way of a movable hypothec) in connection with a loan taken out for the purpose of earning income from a business or property.

Questions to the CRA

(a) Does the CRA agree with the conclusion set out in Interpretation Letter 19-045061-001 (footnote 1) issued on January 28, 2020 by the Agence du revenu du Québec, which recognized that a taxpayer could deduct, in computing the taxpayer’s income from a business or property, as a guarantee expense, the premiums on a CII policy contracted and assigned to the lender at the latter's request, pursuant to section 176.4 of the Taxation Act[19], the corresponding paragraph of which is paragraph 20(1)(e.1) of the I.T.A.?

(b) Does the answer remain the same where the lender is designated as the beneficiary of the CII policy and no moveable hypothec is granted?

CRA Response

No, our position remains the same as that expressed in Technical Interpretation 2004-0090181E5 (footnote 2). In this regard, it is our view that premiums payable in respect of a CII policy assigned as security for a loan of the corporation cannot be deducted in computing its income from a business or property by virtue of paragraph 18(1)(b) since they constitute capital expenditures. Furthermore, such premiums are also not deductible pursuant to paragraphs 20(1)(e), 20(1)(e.1) and 20(1)(e.2).

In addition, the CII policy being assigned to the lender by naming the lender as the beneficiary of the policy or by way of a movable hypothec does not change our position as stated above.

Linda Do
October 7, 2022
2022-093631

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 REVENU QUÉBEC, Interpretation Letter 19-045061-001, "Calculation of Business Income - Deduction of Critical Illness Insurance Premiums - Assignment of Policy as Security - Commercial Loan", January 28, 2020.

2 Canada Revenue Agency, Technical Interpretation 2004-0090181E5, November 30, 2004

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Text of Severed Letter

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.

Position: No.

Reasons: According to the law and previous positions.

TABLE RONDE SUR LA FISCALITÉ DES STRATÉGIES FINANCIÈRES ET DES INSTRUMENTS FINANCIERS DU 7 OCTOBRE 2022

APFF – CONGRÈS 2022

6. Déductibilité des primes d’une police d’assurance maladies graves cédée à titre de garantie d’un emprunt pour gagner un revenu de biens ou d’entreprise

Une société par actions détient une police d’assurance contre les maladies graves (« police d’AMG ») qu’elle a souscrite à l’égard de son actionnaire unique. Cette police a été cédée en garantie à la demande du prêteur (au moyen d’une hypothèque mobilière) dans le cadre d’un emprunt contracté dans le but de gagner un revenu provenant d’une entreprise ou de biens.

Questions à l’ARC

a) Est-ce que l’ARC partage la conclusion énoncée dans la lettre d’interprétation 19-045061-001 (footnote 1) rendue le 28 janvier 2020 par l’Agence du revenu du Québec qui reconnaît qu’un contribuable pourrait déduire, dans le calcul de son revenu d’entreprise ou de biens, à titre de frais de garantie, les primes d’une police d’AMG contractée et cédée au prêteur à la demande de ce dernier en vertu de l’article 176.4 de la Loi sur les impôts dont son correspondant est l’alinéa 20(1)e.1) L.I.R.?

b) La réponse demeure-t-elle la même lorsque le prêteur est désigné bénéficiaire de la police d’AMG sans qu’aucune hypothèque mobilière ne soit accordée ?

Réponse de l’ARC

Non, notre position demeure la même que celle exprimée dans l’interprétation technique 2004-0090181E5 (footnote 2) . À cet effet, nous sommes d’avis que les primes payables à l’égard d’une police d’AMG cédée à titre de garantie d’un emprunt de la société ne peuvent être déduites dans le calcul de son revenu d’entreprise ou de biens selon l’alinéa 18(1)b) L.I.R. puisqu’elles constituent des dépenses en capital. De plus, ces primes ne sont également pas déductibles en vertu des alinéas 20(1)e), 20(1)e.1) et 20(1)e.2) L.I.R.

Par ailleurs, le fait que la police d’AMG soit cédée au prêteur en désignant celui-ci comme bénéficiaire de la police ou au moyen d’une hypothèque mobilière ne change pas notre position énoncée ci-dessus.

Linda Do
Le 7 octobre 2022
2022-093631

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 REVENU DU QUÉBEC, Lettre d'interprétation 19-045061-001, « Assurance maladie grave cédée en garantie - prêt commercial », 28 janvier 2020.

2 AGENCE DU REVENU DU CANADA, Interprétation technique 2004-0090181E5, « Assurance maladie grave », 30 novembre 2004.

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.1)

critical illness insurance policy premiums on policy assigned to lender cannot be deducted under s. 20(1)(e.1)

A corporation has a critical illness insurance policy ("CII policy") that it purchased for its sole shareholder. This policy was assigned as security at the request of the lender (by way of a movable hypothec) in connection with a loan taken out to earn income from a business or property. Does CRA agree with the ARQ conclusion in Interpretation Letter 19-045061-001, dated January 28, 2020 that a taxpayer, in computing business or property income could deduct, as a guarantee expense, the premiums on a CII policy contracted by it and assigned to the lender at the latter's request under the Quebec equivalent of s. 20(1)(e.1)?

CRA indicated that, no, its position remained that premiums payable in respect of a CII policy assigned as security for a loan of the corporation cannot be deducted in computing its income from a business or property pursuant to s. 18(1)(b) since they constitute capital expenditures, and that they are not deductible pursuant to s. 20(1)(e), (e.1) or (e.2) – and that this position would not change if the CII policy was assigned to the lender by naming the lender as the beneficiary of the policy or by way of a movable hypothec.

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7 October 2022 APFF Financial Strategies and Instruments Roundtable Q. 6, 2022-0936311C6 F - Illness insurance policy used as collateral

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