29 March 1995 External T.I. 9507275 - DEDUCTIBILITY OF LIFE INS.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.

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

WHETHER A DEDUCTION FOR LIFE INSURANCE PREMIUMS, THE FACTS OF WHICH DO NOT FIT SQUARELY WITHIN PARAGRAPH 20(1)(e.2), COULD BE DEDUCTIBLE UNDER SUBPARAGRAPH 20(1)(e)(ii) AS APPLIED IN IT-309R.

Position TAKEN:

NO.

Reasons FOR POSITION TAKEN:

THE POSITION ADOPTED IN IT-309R TO ALLOW A DEDUCTION WITH RESPECT TO LIFE INSURANCE PREMIUMS, IN LIMITED CIRCUMSTANCES, UNDER SUBPARAGRAPH 20(1)(e)(ii) WAS OVERRULED BY THE FEDERAL COURT OF APPEAL IN "Her Majesty the Queen v. Antoine Guertin", 1988 DTC 6126, (1988) 1 C.T.C. 360. PARAGRAPH 20(1)(e.2) WAS ENACTED TO COUNTER THIS DECISION AND ALLOW, AFTER 1989, A LIMITED DEDUCTION OF PREMIUMS. IT-309R WAS CANCELLED AND REPLACED BY IT-309R2 DATED FEBRUARY 28, 1995.

                       		950727
XXXXXXXXXX			G. Donell

Attention: XXXXXXXXXX

March 29, 1995

Dear Sirs:

Re: Premiums on life insurance used as collateral

This is in reply to your letter of March 9, 1995 concerning your request for a technical interpretation with respect to the deductibility of life insurance premiums and whether a deduction may still be claimed under subparagraph 20(1)(e)(ii) in the limited circumstances described under paragraph 2 of Interpretation Bulletin 309R, dated January 10, 1979 in circumstances where the conditions of paragraph 20(1)(e.2) are not met.

Unless otherwise stated, all references to statute are to the Income Tax Act (the "Act").

It is our view that generally a premium paid under a life insurance policy is a capital outlay and cannot be said to be an outlay or expense made or incurred by a taxpayer for purpose of gaining or producing income from a business or property for purposes of the Income Tax Act. Therefore a deduction would be denied by virtue of paragraph 18(1)(b) unless an express provision such as paragraph 20(1)(e.2) was applicable. Prior to 1990, the Department had taken the position that in the limited circumstances described in IT-309R, dated January 10, 1979, part or all of the premiums paid under a term life insurance policy could be claimed as a cost of borrowing money under subparagraph 20(l)(e)(ii) as long as all of the conditions outlined in paragraph 2 of that bulletin were satisfied.

The Federal Court of Appeal in the case of "Her Majesty the Queen v. Antoine Guertin Ltee" 88 DTC 6126 overruled this position and established that the payment of premiums for life insurance was not a deductible expense under subparagraph 20(1)(e)(ii). To counter that decision and to continue, with modification, the position adopted in IT-309R, paragraph 20(1)(e.2) was enacted with respect to premiums payable after 1989. IT-309R was cancelled and replaced by IT-309R2, dated February 28, 1995 which discusses the application of paragraph 20(1)(e.2) to premiums payable after 1989 under a life insurance policy when the policy has been assigned to a restricted financial institution as collateral for a loan.

It is a question of fact whether or not a taxpayer can deduct an amount pursuant to paragraph 20(1)(e.2) 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. Paragraph 20(1)(e.2) provides for a limited deduction for life insurance premiums when the insurance is required in order to obtain a loan. Such a requirement is usual only when the lender considers that the death of the insured person would compromise repayment of that loan. As a result, one of the conditions is that the lender requires the assignment of the policy. In order to ensure that the deduction applies in situations in which it is normal business practice to provide for such an assignment, the deduction only applies where the lender is a "restricted financial institution" as defined in subsection 248(1), generally a corporation, whose principal business is the lending of money.

In conclusion the life insurance premiums payable on the assigned policies would not, in the circumstances you have described, be deductible under subparagraph 20(1)(e)(ii) or paragraph 20(1)(e.2).

We trust that the above comments are of assistance to you.

Yours truly,

Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch