Principal Issues: Whether premiums paid by a corporation for a critical illness insurance policy used as collateral for a loan for the purpose of earning income from business or property are deductible.
Position: No.
Reasons: According to the law and previous positions.
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6. Deductibility of premiums on critical illness insurance policy assigned as security for a loan to earn property or business income
A corporation holds a critical illness insurance policy ("CII policy") that it purchased for its sole shareholder. This policy was assigned as security at the request of the lender (by way of a movable hypothec) in connection with a loan taken out for the purpose of earning income from a business or property.
Questions to the CRA
(a) Does the CRA agree with the conclusion set out in Interpretation Letter 19-045061-001 (footnote 1) issued on January 28, 2020 by the Agence du revenu du Québec, which recognized that a taxpayer could deduct, in computing the taxpayer’s income from a business or property, as a guarantee expense, the premiums on a CII policy contracted and assigned to the lender at the latter's request, pursuant to section 176.4 of the Taxation Act[19], the corresponding paragraph of which is paragraph 20(1)(e.1) of the I.T.A.?
(b) Does the answer remain the same where the lender is designated as the beneficiary of the CII policy and no moveable hypothec is granted?
CRA Response
No, our position remains the same as that expressed in Technical Interpretation 2004-0090181E5 (footnote 2). In this regard, it is our view that premiums payable in respect of a CII policy assigned as security for a loan of the corporation cannot be deducted in computing its income from a business or property by virtue of paragraph 18(1)(b) since they constitute capital expenditures. Furthermore, such premiums are also not deductible pursuant to paragraphs 20(1)(e), 20(1)(e.1) and 20(1)(e.2).
In addition, the CII policy being assigned to the lender by naming the lender as the beneficiary of the policy or by way of a movable hypothec does not change our position as stated above.
Linda Do
October 7, 2022
2022-093631
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 REVENU QUÉBEC, Interpretation Letter 19-045061-001, "Calculation of Business Income - Deduction of Critical Illness Insurance Premiums - Assignment of Policy as Security - Commercial Loan", January 28, 2020.
2 Canada Revenue Agency, Technical Interpretation 2004-0090181E5, November 30, 2004