19 March 2004 Ministerial Correspondence 2004-0058631M4 - Policy Loan Interest

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: To determine what amount, if any, of the amount paid by the taxpayer to the insurer in XXXXXXXXXX is deductible under paragraph 20(1)(c) of the Income Tax Act.

Position: Depends on the terms of the policy

Reasons: The insurer accrued interest on a policy loan held by the taxpayer. The taxpayer did not pay the interest and the insurer capitalized the interest as a new policy loan. The taxpayer did not deduct the interest under paragraph 20(1)(c) in any of the preceding years. Where the interest amount is added to the adjusted cost basis of the policy loan under the terms of the policy, the amount is not deductible from income.

Signed on March 19, 2004

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable Stan Keyes, Minister of National Revenue, has asked me to reply to your letter of January 23, 2004, further to your letter of October 29, 2003, to the Summerside Tax Centre, concerning the amount you paid to the insurer of your life insurance policy in XXXXXXXXXX.

I understand that during the period XXXXXXXXXX, you borrowed a total of $XXXXXXXXXX against your life insurance policy. From the dates of borrowing to XXXXXXXXXX, interest accrued on the original policy loan in the amount of $XXXXXXXXXX. On XXXXXXXXXX, you paid the insurer a total of $XXXXXXXXXX in satisfaction of the original policy loan and the interest accrued. It is your understanding that the interest is deductible under paragraph 20(1)(c) of the Income Tax Act.

When the proceeds of a policy loan are used for the purpose of gaining or producing income, interest paid on the policy loan is either deductible in computing the policyholder's income or added to the adjusted cost basis of the policy.

In order for the interest to be deductible in a taxation year a prescribed Form T2210 must be filed no later than the last day on which the taxpayer is required to file his income tax return for that year. The insurer and the policyholder will indicate on the form the amount of interest paid in the year that has not been added to the adjusted cost basis of the policy.

The terms of the policy must be reviewed in order to determine whether interest accruing on a policy loan is paid in the year that it accrues. The policy may provide that interest accrued in the year is paid by way of a new policy loan. In such circumstances the interest is deductible in respect of the taxation year in which it accrued provided that Form T2210 is filed within the prescribed time. If the deduction for interest is not claimed for that taxation year the amount of the interest is added to the adjusted cost basis of the policy.

When the policy loan is subsequently repaid in cash by the policyholder the amount of the policy loan repayment is added to the adjusted cost basis of the policy.

In your situation it will be necessary to determine by referring to the terms of the policy whether the portion of the payment you made in XXXXXXXXXX that relates to interest that accrued on your policy loan in prior years was added to the adjusted cost basis of your policy. Your insurer is the appropriate party to make this determination.

Should you require clarification of any of the information provided in this letter, I invite you to contact Mr. Lee Workman, Manager, Financial Institutions Section, Income Tax Rulings Directorate, at 0-613-957-3497, or by writing to Place de Ville, Tower A, 320 Queen Street, Ottawa ON K1A 0L5. He is aware of this correspondence and will be pleased to assist you.

I appreciate the opportunity to address your concerns.

							Yours sincerely,

							Stephen Rigby
							Assistant Commissioner
							Policy and Planning Branch

Luisa Majerus
946-3558
February 23, 2004
2004-005863