A corporation borrowed money from a financial institution to acquire an interest in a life annuity contract on the life of its shareholder and was required by the lender to purchase a term life insurance policy on the life of its shareholder and to assign the policy to the lender as security for the loan. Each year, the corporation adds only a portion of the annuity payments received to its income and, for some years, no amount will be added. Is the condition in s. 20(1)(e.2)(i)(B) satisfied for deducting the insurance premiums pursuant to s. 20(1)(e.2)? CRA stated:
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 subsection 12.2(1) 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 money borrowed and 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.