J. Thompson (613) 957-2104
Attention: XXXX
August 20, 1987
Dear Sirs:
Re: Collateral Term Insurance
This is in reply to your letter of June 12, 1987 concerning the deductibility of life insurance premiums on an insurance policy which is collaterally assigned to a lender. More specifically, you have asked for our views on a term life insurance policy whose premiums are adjustable or may be varied at the end of every 5 years. In addition, the policy can have a reduced paid up value after 20 years of paying premiums such that after 20 years the policyholder can elect to stop paying premiums and have term insurance coverage at a reduced level for the rest of his life. For example, a 35 year old male who purchased a $100,000 policy and paid premiums for 20 years could elect to stop paying these premiums and have a paid up term insurance policy of $61,000.
Our Comments
As indicated in your letter, Revenue Canada takes the position that where a lender specifically requires collateral security in the form of life insurance, the related premium cost incurred is deductible pursuant to subparagraph 20(1)(e)(ii) of the Income Tax Act (Canada) (the"Act") if the policy is for term insurance only and meets the other requirements set out in paragraph 2 of Interpretation Bulletin IT-309R .
In the case of the policy which you have described, it is our view that the premiums paid would be deductible in computing income from a business or property as long as the policy is term insurance and the conditions referred to above are met. However, it should be noted that the amount of the deduction must be reasonable in relation to the facts of the particular situation. Therefore, the portion of the premiums paid for the lowest cost type of term insurance which covers the outstanding balance of the loan that is in excess of other collateral available, is usually considered to be reasonable. Thus, if the premiums paid incorporate an additional charge for the paid up addition feature that part of the premium would not be deductible.
These comments represent our opinion of the law as it applies generally. As explained in paragraph 24 of Information Circular 70-6R dated December 18, 1978 this opinion is not a ruling and accordingly it is not binding on Revenue Canada Taxation.
We trust these comments are of some assistance.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch