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.
Subject: Deductibility of Life Insurance Premiums Where Policy used as Collateral for a Loan
This is in reply to your memorandum of May 9, 1991, concerning the deductibility of life insurance premiums, under paragraph 20(1)(e.2) as proposed in draft Bill C-18, where the value of the policy and other assets used as collateral for a loan exceeds the loan balance.
The comments in IT-309R, dated January 10, 1979 and in PS 83-16 dated August 25, 1983 were based on the Department's interpretation of the law prior to the decision in the Antoine Guertin Ltee [[1988] 1 C.T.C. 117] case.
The proposed paragraph 20(1)(e.2) is intended to counter the Antoine Guertin decision. However, as you point out, although proposed paragraph 20(1)(e.2) contains no specific reference to the effect of other collateral or collateral in excess of the loan balance on the deductibility of the premiums, it does contain an overriding constraint that the deductible portion is limited to an amount which may "reasonably be considered to relate to the amount owing from time to time during the year by the taxpayer to the institution under the borrowing". In other words the deduction is limited to the portion of the premium that logically, rationally or plausibly may be regarded to correlate or bear a relationship to the amount of the debt. In our view this "reasonably be considered to relate" test must be applied on a case by case basis in that the details and facts will differ from case to case. The fact that other assets have been pledged and that the lender in accordance with industry practice requires collateral in excess of the loan balance would be the type of factors to be considered in applying the test. These factors can not, in our view, be ignored. Accordingly, we agree that the remarks in PS 83-16 may be considered a better guide, as to the amount of the insurance premium which may "reasonably be considered to relate" to the loan, than the remarks in IT 309R paragraph 7.
We note that the "general rule" in PS 83-16 paragraph 3 is not literally supported by draft paragraph 20(1)(e.2). However, at least in cases where it is difficult to value the other collateral and which are not abusive, we have no objection to this "general rule" as a practical approach to assessing on this issue. We would suggest that the "general rule" could be rephrased to indicate that the premium should not be disallowed in doubtful or borderline cases.
We trust our comments will be of assistance to you.
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, 1991
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, 1991
Email this Content