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.
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File No. 921068 |
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Author: B.G. Dodd |
April 15, 1992
CALU ANNUAL MEETING - MAY 11, 1992
Question 2
POLICY LOANS
Where an amount is advanced by an insurer to a policyholder in accordance with the terms and conditions of a life insurance policy, the "policy loan" is treated as a disposition by the policyholder of an interest in the policy and taxed accordingly. Insurance companies may also make loans to policyholders that are not governed by the terms and conditions of the policy but are made under separate contract in a normal lender/borrower relationship. Typically the policyholder will pledge his or her interest in the policy as collateral security for the loan.
What is the Department's position with regard to such loans where:
(a) the terms and conditions of the policy permit policy loans but the loan is made under separate contract and not necessarily under the same terms and conditions specified in the policy; and
(b) the terms and conditions of the policy do not permit policy loans?
Department's Position
Whether or not a loan made by an insurer to a policyholder in either of situations (a) or (b) above would be a policy loan (as defined in paragraph 148(9)(e) of the Act) is a question of fact which would require a review of the terms and conditions of the particular policy and the loan contract. In our view, depending on the circumstances, the fact that the policy itself may not contain a provision for policy loans, or may contain different provisions from those of the separate loan contract, would not necessarily be determinative.
In general, it should be possible for an insurer to make a loan under a separate contract to a policyholder which is not a policy loan where the loan reflects commercial terms, is capable of standing on its own, and is permitted under the relevant governing statutes.
However, where, for example, the arrangement under either (a) or (b) is one in which funds are advanced to the policyholder who is under no obligation to repay the principal or interest thereon until the death of the insured, the loan would likely be viewed as a policy loan under the Act.
Financial Industries DivisionRulings Directorate
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