Principal Issues: Where a life insurance policy issued prior to December 2, 1982 is assigned as collateral for a loan in the circumstances required by paragraph 20(1)(e.2) of the Act, must the policyholder determine the net cost of pure insurance?
Position: Yes
Reasons: Subsection 20(1)(e.2) requires the calculation of the net cost of the pure insurance
Calu - CONFERENCE FOR ADVANCED LIFE UNDERWRITING (2008)
Question 7
Calculation of NCPI for purposes of paragraph 20(1)(e.2) for a pre'82 life insurance policy
For life insurance policies issued prior to December 2, 1982, there is no requirement to calculate the net cost of pure insurance (NCPI) for the policy or to deduct the NCPI from the premiums paid in determining the adjusted cost basis (ACB) for the policy. However, it is possible that policies issued prior to December 2, 1982 may be assigned as collateral for a loan. While the policyholder/borrower could simply apply for a new policy, there may be any number of reasons why this is not desirable. The insured policyholder could be required to pay increased premiums due to increased age or ratings due to health considerations or the life insured is no longer insurable.
Prior to 1990, IT-309R described the limited circumstances under which, (and prior to the application of paragraph 20(1)(e.2) of the Act), all or part of an insurance premium in respect of term insurance was deductible as a cost of borrowing money under subparagraph 20(1)(e)(ii) of the Act. Subsequently, the current provisions of paragraph 20(1)(e.2) became effective for premiums payable after 1989 restricting the amount of the deduction to the lesser of the NCPI and the premiums paid in the year.
Question:
Where a life insurance policy issued prior to December 2, 1982 is assigned as collateral for a loan in the circumstances required by paragraph 20(1)(e.2) of the Act, would the CRA consider allowing the policyholder to calculate an equivalent NCPI for the purposes of determining if the deduction is available?
CRA's Response
Provided that all the conditions are met, the amount eligible for deduction under paragraph 20(1)(e.2) is the portion of the lesser of
(a) the premiums payable by the taxpayer under a life insurance policy (other than an annuity contract) in respect of the year, and
(b) the net cost of pure insurance in respect of the year, as determined in accordance with the regulations, in respect of the interest in the policy referred to in (a) above.
The CRA is of the opinion that this calculation applies to all life insurance policies used as collateral including the ones issued prior to December 2, 1982.
The net cost of pure insurance under a life insurance policy is to be determined in accordance with section 308 of the Income Tax Regulations. The CRA is of the opinion that this provision applies to all life insurance policies notwithstanding the date of their issuance.
Michel Lambert
(613) 957-8962
April 29th, 2008
2008-027044