1 August 1991 Internal T.I. 911297 F - Deductibility of Life Insurance Premiums where Policy Used as Collateral for a Loan

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.

Subject: Deductibility of Life Insurance Premiums Where Policy used as Collateral for a Loan

This is in reply to your memorandum of May 9,1991, concerning the deductibility of life insurance premiums, under paragraph 20(1)(e.2) as proposed in draft Bill C-18, where the value of the policy and other assets used as collateral for a loan exceeds the loan balance.

The comments in IT-309R, dated January 10, 1979 and in PS 83-16 dated August 25, 1983 were based on the Department's interpretation of the law prior to the decision in the Antoine Guertin Ltee case.

The proposed paragraph 20(1)(e.2) is intended to counter the Antoine Guertin decision. However, as you point out, although proposed paragraph 20(1)(e.2) contains no specific reference to the effect of other collateral or collateral in excess of the loan balance on the deductibility of the premiums, it does contain an overriding constraint that the deductible portion is limited to an amount which may "reasonably be considered to relate to the amount owing from time to time during the year by the taxpayer to the institution under the borrowing". In other words the deduction is limited to the portion of the premium that logically, rationally or plausibly may be regarded to correlate or bear a relationship to the amount of the debt. In our view this "reasonably be considered to relate" test must be applied on a case by case basis in that the details and facts will differ from case to case. The fact that other assets have been pledged and that the lender in accordance with industry practice requires collateral in excess of the loan balance would be the type of factors to be considered in applying the test. These factors can not, in our view, be ignored. Accordingly, we agree that the remarks in PS 83-16 may be considered a better guide, as to the amount of the insurance premium which may "reasonably be considered to relate" to the loan, than the remarks in IT 309R paragraph 7.

We note that the "general rule" in PS 83-16 paragraph 3 is not literally supported by draft paragraph 20(1)(e.2). However, at least in cases where it is difficult to value the other collateral and which are not abusive, we have no objection to this "general rule" as a practical approach to assessing on this issue. We would suggest that the "general rule" could be rephrased to indicate that the premium should not be disallowed in doubtful or borderline cases.

We trust our comments will be of assistance to you.

B.W. DathDirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c.    R. Shultis Director Publications Division