Date: 19991206
Docket: 1999-9-IT-I
BETWEEN:
BHASKAR PATEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
P.R. Dussault, J.T.C.C.
[1] This is an appeal from an assessment for the
appellant's 1995 taxation year.
[2] In 1995, The North West Life Assurance Company of Canada
("North West") issued three T5 forms in the
appellant's name for a total amount of $11,180.65 as interest
from Canadian sources.
[3] In 1980, the appellant had purchased three life insurance
policies from North West. According to the appellant, although
the premiums were required to be paid up front, there was a
provision allowing him to pay only a portion up front and to pay
off the balance as a loan on which interest was to be paid.
[4] Between January 1981 and January 1985, the appellant paid
a total of $7,611.68 in interest. The appellant states that the
interest was never claimed as an expense in his income tax
returns "since the policies were not taxable".
[5] In 1995, the three life insurance policies were
surrendered and North West issued the three above-mentioned T5
forms for a total of $11,180.65. The appellant has been assessed
on that amount for his 1995 taxation year. His claim for the
deduction in 1995 of the total amount paid as interest between
January 1981 and January 1985 has been refused.
[6] Although the appellant says that he has never received a
copy of the T5 forms issued by North West, he does not deny
having received the amount of $11,180.65. Rather, he complains of
having to pay tax on what he describes as "interest
earned" and yet not being able to deduct the interest paid
to earn that income.
[7] Paragraph 56(1)(j) of the Income Tax
Act (the "Act") provides that there shall be
included in computing the income of a taxpayer for a taxation
year any amount required to be so included by
subsection 148(1) or (1.1) of the Act.
[8] Basically, and subject to certain exceptions,
subsection 148(1) of the Act provides for the
inclusion in income of the amount by which the proceeds of the
disposition of a policyholder's interest in a life insurance
policy exceeds the adjusted cost basis of that interest
immediately before the disposition.
[9] Section 217 of the Income Tax Regulations provides
that when an amount is required to be included in computing the
income of a taxpayer pursuant to paragraph 56(1)(j)
of the Act, the insurer shall make an information return
in prescribed form in respect of that amount. The prescribed form
is a T5 form. That is precisely what was done by North West after
the appellant disposed of the three life insurance policies in
1995. There is simply no evidence that the amounts indicated on
the three T5 forms issued by North West were wrongly computed.
Hence, the Minister of National Revenue was right in adding the
total amount of $11,180.65 to the appellant's income for
1995.
[10] As to the amount of $7,611.68 paid by the appellant
between January 1981 and January 1995, as counsel for the
respondent pointed out in her written submissions:[1]
[W]e do not know the terms and conditions of the
appellant's policies since he no longer has the
contracts.
[11] However, information provided by the appellant both at
the hearing and afterwards[2] is to the effect that the loans were not policy loans
as they were granted the same day the policies were issued.
[12] Generally speaking, subparagraphs 20(1)(c)(i)
and (ii) specifically provide that interest paid on money
borrowed to acquire a life insurance policy or on an amount
payable to acquire property that is an interest in a life
insurance policy is not deductible in computing a taxpayer's
income from business or property. Subsection 20(2.2) of the
Act, which excludes certain policies from the definition
of a life insurance policy for the purposes of
paragraphs 20(1)(c) and (d), has no
application in the present case.
[13] Moreover, as the loans were not policy loans the proceeds
of which were used for the purpose of earning income from a
business or property (other than property that was a life
insurance policy), the exception provided for in
subsection 20(2.1) of the Act would not be
applicable. I might add that, in any event, when the deduction of
interest on a policy loan is permitted upon satisfying the
conditions set forth in that subsection, such a deduction could
only be claimed in the year in which it has accrued or in the
year in which it was paid.[3]
[14] Unfortunately, there is no relief that can be granted to
the appellant in the present case.
[15] On the basis of the foregoing, the assessment is thus
confirmed and the appeal is dismissed.
Signed at Ottawa, Canada, this 7th day of December 1999.
"P.R. Dussault"
J.T.C.C.
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