Principal issues: [TaxInterpretations translation] Is the condition in clause 20(1)(e.2)(i)(B) satisfied where only a portion of the interest is deductible pursuant to subparagraph 20(1)(c)(iv)?
Position: Yes
Reasons: Wording of the Act. There is no requirement that all interest be deductible.
XXXXXXXXXX 2004-007703 Michel Lambert CA, M.Fisc. October 25, 2004
Dear Sir,
Subject: Application of clause 20(1)(e.2)(i)(B) of the Act
This is in response to your email of May 18, 2004 asking whether an insurance premium is deductible pursuant to paragraph 20(1)(e.2) of the Act in the following situation.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act.
A corporation borrowed 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 required 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.
Each year, the corporation will receive an annuity, only a portion of which must be added to its income. You stated that for some years, no amount will be added to the corporation's income. In addition, the corporation will pay the insurance premiums and the interest charges on the loan.
You asked whether the corporation can deduct insurance premiums pursuant to paragraph 20(1)(e.2). Specifically, you wish to know if the condition in clause 20(1)(e.2)(i)(B) is satisfied.
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
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), the 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) and (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 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.
As stated in Information Circular 70-6R5, this opinion is not an advance income tax ruling and is not binding.
Best regards,
Section Manager
for the Director of the Directorate
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch