15 April 1994 External T.I. 9407245 - CREDITOR LIFE INSURANCE POLICY

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.

Principal Issues:

1.Whether or not the premiums in respect of a creditor life insurance policy are deductible pursuant to paragraphs 20(1)(e), (e.1) or (e.2) of the Income Tax Act.

2.Whether or not section 80 of the Income Tax Act may apply on the repayment of an outstanding loan with the proceeds from the creditor life insurance policy.

3.Whether or not such proceeds can increase the capital dividend account pursuant to subparagraph 89(1)(b)(iv) of the Income Tax Act.

Position TAKEN:

1.No. However, it is a question of fact whether or not such premiums are deductible pursuant to 20(1)(e.2).

2.It is a question of fact.

3. It is a question of fact. However, it appears that it would not.

Reasons FOR POSITION TAKEN:

1.We were advised that there would not be any assignment of the creditor life insurance policy to the lender as is required in paragraph 20(1)(e.2) of the Act. Following the Antoine Guertin decision (1988 DTC 6126, F.C.A.) no deduction would be permitted in respect of such a policy pursuant to paragraph 20(1)(e) of the Act since the premiums would not be considered to have been incurred in the course of borrowing money. We do not consider the premiums to be one of the fees referred to in paragraph 20(1)(e.1) of the Act.

2. It is a question of fact whether or not section 80 of the Act would apply to such a repayment. We would need to review a particular situation.

3. It is a question of fact. However, the corporation is not the owner of the policy and is apparently not entitled to proceeds in respect of the policy.

XXXXXXXXXX 940724

Attention: XXXXXXXXXX

April 15, 1994

Dear Sirs:

Re: Creditor Insurance

This is in reply to your March 17, 1994 letter wherein you requested our comments regarding the tax treatment of certain aspects of a creditor insurance arrangement ("creditor insurance arrangement"). Unless as otherwise stated all references in this letter to statute are to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act").

Whether or not a particular creditor insurance arrangement is a life insurance policy for purposes of the Act is a determination which can only be done by reviewing the particular arrangement and any relevant documents and agreements. This determination requires disclosures of all the relevant facts and circumstances and can only be made on an advance ruling basis in respect of a proposed arrangement or as a referral to your local District Taxation Office in respect of an existing arrangement. The involvement of XXXXXXXXXX in respect of such an arrangement would also have to be taken into account by the Department in the course of its review. In this regard, we refer you to our Information Circular 70-6R2.

The tax treatment of premiums and benefits under a particular creditor insurance arrangement will, as indicated above, depend on the particular circumstances of the situation. For this reason, we cannot provide you with any specific comments but we have, nevertheless, provided you with our general comments and we have assumed for this purpose that the particular creditor insurance arrangement would be a life insurance policy for purposes of the Act.

It is a question of fact whether or not a taxpayer can deduct an amount pursuant to paragraph 20(1)(e.2) of the Act in respect of premiums relating to a particular life insurance policy since one must determine whether or not all the conditions set out in that paragraph have been met. You have indicated in your letter that the lender would be the owner and the beneficiary under the policy. Since the lender would be the policyholder under the Act, the debtor is not in a position to assign the policy as security for the borrowing. You also indicated in your letter that there would not be, at any time, any assignment of the policy in favour of the lender. Consequently, it is our view that the premiums in respect of such a policy would not be deductible pursuant to paragraph 20(1)(e.2) of the Act as the policy cannot be assigned as collateral for a loan and therefore fails to meet the requirement in clause 20(1)(e.2)(i)(A) of the Act. It also fails to meet the requirement in clause 20(1)(e.2)(i)(C) of the Act.

It is our view that following the Antoine Guertin Ltée decision, 88 DTC 6126 (Federal Court of Appeal) which also referred to the Equitable Acceptance Corporation Limited decision, 64 DTC 5045 (Exchequer Court) the premiums on a life insurance policy are not deductible pursuant to paragraph 20(1)(e) of the Act because they are not considered to be an expense incurred in the course of borrowing money used for the purpose of earning income from a business.

It is also our view that such premiums cannot be considered to be "a standby charge, guarantee fee, registrar fee, transfer agent fee, filing fee, service fee or any similar fee" as described in paragraph 20(1)(e.1) of the Act and similarly as described in the proposed amendment to this paragraph as set out in the December 1992 technical bill and are, therefore, not deductible under that provision.

Whether or not section 80 or subparagraph 89(1)(b)(iv) of the Act would apply in respect of a particular creditor insurance arrangement can only be determined upon review of all the pertinent and relevant facts. However, we note that where the debtor is not entitled to any proceeds from the life insurance policy the debtor will not be entitled to an inclusion in its capital dividend account as provided in paragraph 89(1)(b)(iv) of the Act.

We would note further that the determination of whether either of section 80 or subparagraph 89(1)(b)(iv) of the Act are applicable to any particular situation is not dependent upon the deductibility of the premiums on the policy pursuant to paragraph 20(1)(e.2) of the Act.

Although we trust that our comments are of assistance to you, we would note that they do not constitute an advance income tax ruling and, therefore are not binding on the Department in respect of a particular insurance policy.

Yours truly,

Acting Section Chief
Financial Institutions
Financial Industries Division
Rulings Directorate