26 April 1993 Internal T.I. 9307767 F - Deductibility of Life Insurance Premiums

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.

April 26, 1993

Attention:  Philip J. Richardson 

Basic Files

Paragraph 20(1)(e.2) of the Income Tax Act (the "Act")

This is in reply to your memorandum of March 8, 1993 concerning paragraph 20(1)(e.2) of the Act, as that provision would pertain to a sample insurance policy issued by XXXXXXXXXX

XXXXXXXXXX

Paragraph 20(1)(e.2) of the Act provides for a deduction for premiums on a life insurance policy where the policy is assigned as collateral for a loan and certain other conditions are met. The deduction is limited to the lesser of the net cost of pure insurance and the premiums payable in respect of the year that may reasonably be considered to relate to the amount owing under the borrowing. The policy referred to in paragraph 20(1)(e.2) of the Act is not restricted to a term insurance policy as was the case where the deduction of the life insurance premiums was subject to paragraph 20(1)(e) of the Act and IT-309R.

As noted in your memorandum, net cost of pure insurance is defined in section 308 of the Income Tax Regulations (the "Regulations") and is the product obtained when the probability (of death) is multiplied by the amount by which

(a)     the benefit on death

exceeds

(b)     the accumulating fund at the end of the year or the cash surrender value ("CSV") of such interest at the end of the year, depending on the method regularly followed by the life insurer in computing net cost of pure insurance. (XXXXXXXXXX)

Accumulating fund in respect of an interest in a life insurance policy, other than an annuity contract or a deposit administration fund policy, is defined in subparagraph 307(1)(b)(ii) of the Regulations as the maximum amount that could be deducted at that particular time by the life insurer under paragraph 1401(1)(c) of the Regulations in respect of the policy.

CSV is defined in paragraph 148(9)(b) of the Act as the CSV at that time computed without regard to certain items. Therefore, where the policyholder is not entitled to any amount until the 20th anniversary date of the policy, there is no CSV until that time.

To the extent that CSV is the method regularly used by the life insurer in computing the net cost of pure insurance and the CSV is nil, the net cost of pure insurance will simply be the product obtained when the probability of death multiplied by the benefit on death.

For the XXXXXXXXXX policy, in respect of any given year, the net cost of pure insurance would likely be less than the premiums payable under the policy. The portion of the net cost of pure insurance that would be deductible under paragraph 20(1)(e.2) of the Act would be the amount that may reasonably be considered to relate to the amount owing under the loan for which the insurance policy has been assigned as collateral. For example, where the life insurance coverage under the assigned policy is $1,100,000 and the average balance owing under the loan during the taxation year is $660,000, the amount deductible would be 60% the net cost of pure insurance under the policy for the year.

We hope our comments are of assistance to you. Should you have any questions concerning this memorandum please contact T. Murphy.

Section Chief Financial Industries Financial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch