Principal Issues: [TaxInterpretations translation] Many professionals are required to maintain liability insurance for actions taken in the course of their practice for a number of years after they cease operating their business. Are such premiums deductible even though they are incurred after the cessation of their business?
Position: Yes.
Reasons: Consistent with the principle in Jean-Camille Poulin, 96 DTC 6477
XXXXXXXXXX 2004-009101
N. Deslandes, CGA
December 21, 2004
Dear Madam,
Subject: Deductibility of liability insurance premiums
This is in response to your fax of August 13, and October 14, 2004, in which you requested our opinion on the above subject. We apologize for the delay in responding to your request.
You indicated that many professionals are required, as part of their practice, to hold liability insurance for actions taken in the course of their professional activities during the years in which they carry on their professional activities. For many of them, this obligation continues for a number of years after they cease their business.
You asked us whether these professionals can deduct, pursuant to the Income Tax Act (the "Act"), such insurance premiums incurred after the cessation of their business. You indicated that if the professionals in question did not have liability insurance, any expenses resulting from legal proceedings instituted against them after the cessation of their business but based on acts performed in the course of their business would be deductible. You referred, among other cases, to Attorney General of Canada v. Poulin, 96 DTC 6477 FCA.
Our Comments:
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue a written opinion regarding proposed transactions otherwise than by 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 may not, however, apply to your particular situation in certain circumstances.
Paragraph 18(1)(a) prevents the deduction, in computing the income of a taxpayer's business, of an expense that was not made or incurred by the taxpayer for the purpose of earning income from the business.
However, it is possible that a taxpayer may be able to deduct an expense of a current nature incurred in respect of a business in a year even though the taxpayer was no longer actively engaged in that business in that year. This conclusion is consistent with the principle in Attorney General of Canada v. Jean-Camille Poulin, 96 DTC 6477 FCA, that an expense paid in a year in which a taxpayer is no longer carrying on business may be deducted in that year since the taxpayer cannot be considered to have ceased to carry on business as long as the taxpayer is engaged in following up on actions taken by the taxpayer in the course of carrying on business.
In light of the foregoing comments, we are of the view that premiums paid by a taxpayer to maintain liability insurance in respect of actions taken in the course of carrying on the taxpayer's business would be deductible in computing the taxpayer's income. Where applicable, however, consideration must be given to the application of subsection 18(9) of the Act where the premiums are prepaid.
These comments are not advance income tax rulings and do not bind the Canada Revenue Agency with respect to any particular factual situation.
We hope you find these comments of assistance.
Best regards,
Ghislain Martineau, CGA
Manager
Financing and Plans Section
Financing and Plans Division
Policy and Planning Branch