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.
Dear Sirs:
RE: Policy Loans
This is in reply to your letter of October 18, 1984 concerning the tax treatment of policy loans pursuant to section 148 of the Income Tax Act (the Act).
We agree with your comments (set out in numerical order) concerning the treatment of policy loans, in the calculation of the adjusted cost basis of a life insurance policy at a particular time as set out in paragraph 148(9)(a) of the Act.
Where the insured person dies, you question how the amount of policy loans "outstanding" at that time is to be treated, presumably for the calculation of the income inclusion under subsection 148(1) of the Act and the life insurance capital dividend in paragraph 89(1)(b.2) of the Act.
Our Comments:
1. In the event of the death of the person whose life was insured, by virtue of paragraph 148(2)(b) of the Act, the policyholder is deemed to have disposed of his interest "immediately before the death" for proceeds equal to the related "accumulating fund" as determined immediately before the time of death (subparagraph 148(9)(a.2)(iv), which may give rise to an income inclusion under subsection 148(1) of the Act.
2. In the case of paragraph 89(1)(b.2) of the Act, the excess of the proceeds received as a consequence of the death of the insured person over the adjusted cost basis "immediately before that person's death" is the amount to be included in the life insurance capital dividend account. It is our view that for this purpose the proceeds would simply be the amount received from the insurer by the policy holder, with appropriate results, since any policy loans "outstanding" would have reduced both the amount of the proceeds received by the policy holder and the adjusted cost basis of the policy.
3. In connection with your comments about policy loan repayments, we note that the "policy loan" is not in fact a loan, but rather a withdrawal by the policy holder out of the cash value of his policy. The treatment outlined is consistent with this fact (i.e. amounts withdrawn effectively reduce the adjusted cost basis, the "accumulating fund" in respect of the policy and the proceeds referred to in paragraph 89(1)(b.2) of the Act). In view of the foregoing it is not necessary to consider whether a policy loan is repaid as a result of the death of the insured as suggested in your letter.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1984
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1984
Email this Content