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Wyman W. Webb (613) 957-2109
Aug 29 1988
Dear Sirs:
Re: Section 55 of The Income Tax Act (the"Act")
This is in reply to your letter of August 3, 1988 in which you requested our opinion with respect to the deduction of payments for life insurance premiums in the calculation of safe income of a corporation for the purposes of section 55 of the Act when such payments are not deductible in computing the income of the corporation for the purposes of the Act. The expression "safe income" is defined in the paper by John R. Robertson entitled "Capital Gains Strips: A Revenue Canada Perspective on the Provisions of Section 55" (Conference Report of the Thirty-Third Tax Conference of the Canadian Tax Foundation, 1981).
On page 90 of this Conference Report it is stated that:
a deduction for any expense incurred or disbursement made in the period that was not allowed or not claimed as a deduction in computing income will reduce safe income. However, there will be no deduction for an expense incurred or disbursement made in respect of the acquisition of property, an eligible capital expenditure, or a repayment on account of the principal amount of a loan.
Therefore, any amount paid by a corporation in respect of a premium for a life insurance policy on the lives of the shareholders of a corporation that is not deductible in computing the income of the corporation for the purposes of the Act would reduce the safe income of the corporation, subject to the following comment concerning life insurance policies with cash surrender values. If the insurance policy has a cash surrender value, which the corporation is entitled to receive on surrendering the policy, then such premiums, to the extent that the amount paid is reflected in the cash surrender value of the policy, would not reduce the safe income of the corporation. In these cases, the excess of the premiums paid over the cash surrender value of the life insurance policy would reduce the safe income of the corporation.
Our comments herein are provided pursuant to the practice referred to in paragraph 24 of Information Circular 70-6R.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch