Principal Issues: [TaxInterpretations translation] What is the CRA's position on the deductibility of premiums paid for “overhead expense” insurance?
Position: The position set out in Interpretation Bulletin IT-223 continues to represent the position of the CRA.
Reasons: The position is in accordance with the Act.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE-- 2010 APFF CONFERENCE
Question X - Interpretation Bulletin IT-223 and deductibility of the overhead expense insurance premium
The CRA commented as follows in paragraph 2 of Interpretation Bulletin IT-223 (footnote 1),
“An overhead expense insurance policy normally will provide for reimbursement to the insured for certain kinds of expenses only, and it is probable that the maximum amount, either periodic or total, payable under the policy will be set out. Where the overhead expense insurance policy provides that no more will be payable under the policy than the amount of the overhead expense actually incurred or paid by the insured during his period of disablement the premium will be allowable as a business expense and any benefit received thereunder will be included in income.”
Interpretation Bulletin IT-223 was archived on January 8, 2003.
In a recent Technical Interpretation, the Income Tax Rulings Directorate provided comments on a factual situation that could be interpreted as a relaxation in the CRA's position regarding the deductibility of premiums for such an overhead expense insurance policy from business income.
In answer to a question on whether the difference between the maximum total compensation received from an insurer and the office expenses actually incurred during the maximum benefits period was taxable, the following comments were made:
“[TaxInterpretations translation] In this case, we are of the view that the difference between the maximum total compensation received from your insurer and the office expenses you actually incurred during the maximum benefits period must be included in computing your income under subsection 9(1). Furthermore, premiums paid on the disability insurance policy are deductible in computing your business income for the year in which the premiums are paid (footnote 2).”
Questions to the CRA
1- Could you clarify the CRA's position regarding the deductibility of premiums paid for overhead expense insurance and more specifically
a. Indicate whether the fact that an overhead expense insurance policy "no more will be payable under the policy than the amount of the overhead expense actually incurred or paid by the insured" is a condition for the deductibility of premiums.
b. Specify whether, where a policy stipulates that amounts may be paid in addition to the amount of overhead expenses actually incurred, the premium may still be deductible, in whole or in part.
c. Specify whether there are other criteria or conditions affecting the deductibility of overhead expense insurance premiums.
2- Could you clarify whether the CRA's position has changed from that reflected in Interpretation Bulletin IT-223 and for what reason the Bulletin was archived?
CRA Response
The position set out in Interpretation Bulletin IT-223 generally represents the CRA's opinion regarding the taxation of benefits received under an overhead expenses insurance policy. The same applies to the deduction of premiums. That Bulletin was archived because it was not widely used and it deals with a very specific issue.
As stated in paragraph 4 of the Bulletin, where a policy covers other risks in addition to overhead expenses, the premium for the “overhead expense insurance” part of the policy will be allowable as described in paragraph 2, provided that the taxpayer furnishes sufficient evidence to enable that part of the premium to be ascertained.
A taxpayer or the taxpayer’s representative must be very cautious when referring to a Technical Interpretation letter as it has its own limitations. Our opinions are not written to cover all possible circumstances or situations. Similarly, the legislative provisions or policies that are dealt with may no longer be applicable. In addition, there is no mechanism to update or revoke the opinions stated therein.
The opinion to which you referred was made subject to the limitations which we have just enumerated and the conditions which are stated in the opinion. As stated, we assumed that the benefits were intended to cover overhead expenses. It was added that the insurance of which the taxpayer was a beneficiary should be distinguished from the income insurance which protects against the loss of income.
Michel Lambert
(613) 957-8968
October 8, 2010
2010-037852
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-223 (Archived), "Overhead Expense Insurance vs. Income Insurance", May 26, 1975.
2 CANADA REVENUE AGENCY, Technical Interpretation 2009-033769, February 8, 2010.