17 June 1999 External T.I. 9909075 - REPAYMENT OF POLICY LOANS

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: Whether or not a policy loan is repaid as a consequence of death of the policyholder for the purpose of paragraph 60(s).

Position: Question of fact - but generally would not be considered to be repaid.

Reasons: Normally, where the terms of the policy only provide for a net payment this does not constitute a repayment of the loan.

XXXXXXXXXX 		990907

Attention: XXXXXXXXXX

June 17, 1999

Dear Sirs:

Re: Paragraph 60(s) - Repayment Of Policy Loans

This is in reply to your facsimile letter dated April 6, 1999, concerning the income tax consequences under the Income Tax Act (the Act) where a policy loan has been made under the terms of a life insurance policy that was either last acquired before December 2, 1982, or was considered an "exempt policy" within the meaning of subsection 306(1) of the Regulations to the Act.

Specifically, you ask whether the policyholder would be entitled to a deduction under paragraph 60(s) in the year of death when the amount of the death benefit payable under the terms of the life insurance policy is reduced by the amount of the policy loan outstanding at the time of death.

It is not possible to confirm the income tax consequences without examining the terms and conditions of the particular insurance policy involved. Where the situation is in respect of a proposed transaction between specific taxpayers the income tax consequences can only be confirmed by our Directorate where a request for an advance income tax ruling has been made in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30,1996, issued by Revenue Canada. If the situation relates to a completed transaction, the request must be made to the local Tax Services Office. In either case, the Department would require a complete description of all the relevant facts, information, including a copy of the particular insurance policy. Notwithstanding the above we are prepared to offer the following comments which we caution may or may not be applicable to your particular situation.

Pursuant to subsection 148(9) of the Act an "amount payable" in respect of a policy loan is defined under subsection 138(12) of the Act as meaning the amount of the policy loan and the interest thereon that is outstanding at that time. Generally, where the policyholder dies and the insurer reduces the amount of the death benefit paid to the deceased policyholder's beneficiary or estate by the amount owing by the policyholder at the time of death on a policy loan in our view this does not constitute a repayment of an amount payable in respect of a policy loan. Consequently, it is our view that paragraph 60(s) of the Act would not be applicable in these circumstances.

The above view is also consistent with the similar situation where a policyholder surrenders his/her interest in an exempt policy other than as a consequence of death. For example, the definition of "cash surrender value" in subsection 148(9) of the Act must be determined without taking into account any policy loans made under the policy. The definition of "proceeds of the disposition" in paragraph 148(9)(a) of the Act considers the amount of the cash surrender value in the policy at the time of surrender or maturity of the policy and deducts from this amount an "...amount payable at that time by the policyholder in respect of a policy loan...". Therefore, we are of the general view that where the policy loan has not been in fact repaid by the policyholder before the time of surrender or death that it remains as an amount payable in respect of a policy loan at that time.

This also appears to yield the appropriate tax result to the insurer. Although the insurer would not be required to include any amount in its income pursuant to paragraph 138(4)(c) of the Act where there is no repayment of the "policy loan" the insurer would nevertheless only be entitled to deduct the net amount paid out as described above.

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