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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
SUBJECT: INSURANCE & OTHER COLLATERAL IN EXCESS OF LOAN
BALANCE SECTION: 20(1)(E.2)]
920459
XXX T. Murphy
(613) 957-3496
Attention: XXX
May 19, 1992
Dear Sirs:
Re: Paragraph 20(1)(e.2) of the Income Tax Act (the "Act")
This is a reply to your letter of February 10, 1992 concerning paragraph 20(1)(e.2) of the Act. Your specific concern is the interpretation of that paragraph in a situation where a restricted financial institution ("RFI"), before granting a loan, requires both a specified amount of coverage under a life insurance policy and other assets to be pledged as collateral for the loan such that the total value of the collateral exceeds the loan balancce.
In our opinion, in such a case, the deduction under paragraph 20(1)(e.2) of the Act would not necessarily be denied or reduced because of the existance of collateral other than the life insurance policy unless the insurance coverage plys the realizable value of other collateral is excessive or the requirement to provide life insurance as collateral is made simply to accommodate the borrower.
In other words, there must be a genuine requirement to provide the specified amount of collateral insurance and the borrower should not, accordingly, have any control over the amount of coverage. Therefore, assuming all the requirements of paragraph 20(1)(e.2) of the Act are otherwise met, a deduction for the full amount of the premium may be available where the insurance coverage does not exceed the maximum amount of the loan outstanding during the year notwithstanding that other collateral is required by the RFI.
Where the maximum amount of the loan is not outstanding throughout the year, it will be necessary to prorate the amount of the premium on a reasonable basis as indicated in the example in paragraph 7 of Interpretation Bulletin IT-309R.
We expect that Interpretation Bulletin IT-309R, which is presently under revision as a result of the enactment of paragraph 20(1)(e.2) of the Act, will be amended to reflect our comments as stated above for premiums payable after 1989.
While we hope our comments are of assistance to you they do not apply to any specific case particularly given that the deductibility of premiums for collateral insurance must be determined on a case by case basis.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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