Principal Issues: [TaxInterpretations translation] Is the condition in clause 20(1)(e.2)(i)(B) satisfied where only part of the interest is deductible by virtue of subparagraph 20(1)(c)(iv)?
Position: Yes
Reasons: Wording of the Act. There is no requirement that all interest be deductible.
FINANCIAL SERVICES ROUND TABLE
2004 APFF CONFERENCE
Question 1
Deductibility of a life insurance premium of a policy pledged to a financial institution where only part of the interest is deductible.
A corporation borrows money from a financial institution to acquire an interest in a life annuity contract on the life of its shareholder. In making the loan, the lender requires the corporation to purchase a term life insurance policy on the life of its shareholder and to assign the interest in that policy to the lender as security for the loan. The annuity contract is a contract to which subsection 12.2(1) applies. The financial institution and the insurer are separate entities.
Can the corporation deduct the insurance premiums pursuant to paragraph 20(1)(e.2)? More specifically, is the condition in clause 20(1)(e.2)(i)(B) satisfied?
CRA Response
Premiums for a life insurance policy used as security for a loan may be deductible pursuant to paragraph 20(1)(e.2) if, among other things, and as provided in clause 20(1)(e.2)(i)(B), interest payable on the loan is deductible in computing the borrower's income for the year or would be so deductible but for subsections 18(2), 18(3)(1), and sections 21 and 28.
Subparagraph 20(1)(c)(iv) provides a deduction for interest on borrowed money used to acquire an interest in an annuity contract in respect of which section 12.2 applies or would apply if the contract had an anniversary day in the year at a time when the taxpayer held the interest. However, where annuity payments have begun under the contract in a preceding taxation year, the amount of interest paid or payable in the year shall not be deducted to the extent that it exceeds the amount included under section 12.2 in computing the taxpayer’s income for the year in respect of the taxpayer’s interest in the contract.
Consequently, a portion of the interest on borrowed money used to acquire an interest in an annuity contract may not be deductible in computing a taxpayer's income. However, we are of the view that the condition in clause 20(1)(e.2)(i)(B) is satisfied for a taxation year if some or all of the interest is deductible in that year pursuant to subparagraph 20(1)(c)(iv). If no interest is deductible in a taxation year, this condition is not satisfied for that taxation year.
Michel Lambert
October 8, 2004
2004-008555