24 November 1998 External T.I. 9813845 - SEGREGATED FUNDS - INTEREST

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: Deductibility of interest on the acquisition of an interest in a segregated funds. Is deductibility affected by assets held in the segregated fund?

Position: Interest would not be deductible unless paragraph 20(2.2)(c) applies. Even so other conditions in paragraph 20(1)(c) must be met and as a result the assets held by the trust may impact the deductibility.

Reasons: The law.

XXXXXXXXXX 		981384

Attention: XXXXXXXXXX

November 24, 1998

Dear Sirs:

Re: Deductibility of Loan Interest - Segregated Funds

This is in reply to your facsimile of May 28, 1998, concerning your question on the deductibility of interest expense under the Income Tax Act (the Act) where a person borrows money to purchase an interest in an “unregistered” segregated fund policy issued by a life insurance company. In your facsimile you indicate that person may acquire an interest in a segregated fund that invests only in bonds or in equities. You ask whether the deductibility of interest would be impacted by the types of properties a particular segregated fund may invest in.

Our Comments

Generally, interest paid or payable on borrowed money used to acquire an interest in a life insurance policy or on an amount payable to acquire an interest in a property that is an interest in life insurance policy (other than an interest in an annuity contract in respect of which section 12.2 applies) is not deductible since subparagraphs 20(1)(c)(i) and (ii) of the Act specifically preclude such a deduction.

However, there is an exception to the above noted rules (and for compound interest in paragraph 20(1)(d) of the Act) for certain types of life insurance policies described in subsection 20(2.2) of the Act. Paragraph 20(2.2)(c) of the Act provides that for the purpose of paragraphs 20(1)(c) and (d) (for 1987 and subsequent taxation years), a life insurance policy does not include a policy that is an annuity contract issued by an insurer where all of the insurer's reserves for the contract vary in amount depending on the fair market value of a specified group of properties.

Since subsection 138(12) of the Act defines a life insurance policy to include, an annuity contract and a contract where all or any part of the insurer's reserves for which vary in amount depending on the fair market value of a specified group of assets (i.e. a "segregated fund", as defined in subsection 138.1(1) of the Act), the exclusion in paragraph 20(2.2)(c) of the Act would apply to a segregated fund policy that is also considered to be an annuity contract. Assuming that paragraph 20(2.2)(c) of the Act applies to a particular segregated fund policy, a deduction in respect of interest paid or payable by a taxpayer to acquire an interest in a such a policy may be available, subject in part, to whether the other conditions described in paragraphs 20(1)(c) and (d) of the Act are met (and subject to the limitation in subsection 18(11) of the Act). In this regard, it should be noted interest expense incurred to earn capital gains (or capital losses) is not deductible under paragraph 20(1)(c) of the Act.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996 and are not binding on the Department in respect of any particular situation.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch