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:
Is a taxpayer/policyholder entitled pursuant to paragraph 20(1)(e.2) of the Act to deduct as premiums in respect of a life insurance policy used as collateral for a loan amounts made as withdrawals from the investment account of a universal policy which are used to cover costs of insurance and certain policy fees?
Position: No.
Reasons:
For the purposes of paragraph 20(1)(e.2) of the Act the premium payable by a taxpayer under a life insurance policy in respect of the year is the amount paid by the policyholder to the insurer in the year. Amounts transferred from the investment account to cover costs of insurance and policy fees do not constitute premiums and are therefore not relevant for the purposes of paragraph 20(1)(e.2) of the Act.
XXXXXXXXXX 990187
Attention: XXXXXXXXXX
April 23, 1999
Dear Sirs:
Re: Deductibility of Premiums For Life Insurance Held as Collateral
This is in reply to your letter dated January 21, 1999, wherein you are requested our comments with respect to the deductibility of premiums for life insurance held as collateral for a loan pursuant to subsection 20(1)(e.2) of the Income Tax Act (the "Act"). Specifically, you want to know if the amounts you describe as a "Monthly Deduction" which are funded by withdrawals from a policyholder's deposits to their investment account under a universal life policy XXXXXXXXXX may reasonably be considered as "premiums payable by the taxpayer under a life insurance policy in respect of the year" as required by paragraph 20(1)(e.2)(i) of the Act.
Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30,1996, issued by Revenue Canada. However, if the situation relates to a completed transaction a request for the Department’s views must be made to your local Tax Services Office. Notwithstanding the above we can offer the following comments.
Subparagraph 20(1)(e.2)(i) of the Act refers to premiums being payable by a taxpayer under a life insurance policy in respect of the year. It is our understanding based on a discussion with you (Trotier/XXXXXXXXXX), that payments made by a policyholder in a particular year, notwithstanding that such payments are in excess of specified minimum amounts necessary to cover the risk and administrative charges for the year, are treated by the insurer as a premium under the policy for that particular year and no portion of such premium is considered to represent a prepaid premium. Consequently you advise that the full amount of the premium received by the insurer is included in the insurer’s income in the year of receipt as a premium and is also fully reflected in the policyholder's adjusted cost basis and cash value of the policy at that time.
Based on the above facts, it is our opinion that the full amount of such a premium is payable in respect of the year in which it required to be paid by the policyholder under the terms of the policy. The fact that mortality and administrative charges in subsequent years may be funded by way of the Monthly Deductions from the build-up in the policy's accumulating fund is in our view not relevant to the determination of which particular year the premium is considered to be in respect of. Unless a portion of the premium paid in a particular year by a policyholder in fact represents a prepaid premium (and such premium is treated as such by the insurer) then we see no basis for treating any Monthly Deductions as a premium paid by the policyholder in respect of the year in which they are deducted. By way of comparison no amount would be deductible under paragraph 20(1)(e.2) of the Act for any policy that is paid up.
While we trust that our comments will be of assistance to you as indicated in paragraph 22 of IC-70-6R3 this opinion is not a ruling and accordingly, it is not binding on Revenue Canada.
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch
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