Moore
April 2020 Newsletter

Life insurance premiums are normally not deductible in computing income because they are considered personal expenses.

However, there is an exception, where you (or your corporation) may deduct life insurance premiums. Typically, this will apply when you run a business and go to a bank or other financial institution for a loan. If your business does not have “hard” collateral, the institution may ask for collateral in the form of life insurance on your life (or that of another key employee in the business). Basically, you would assign the insurance policy to the institution as collateral on your loan.

Generally, the premiums will be deductible if the loan is used for the purpose of earning income from a business or property.

However, the deduction for a taxation year is limited to the “net cost of pure insurance in respect of the year”. Furthermore, the deduction is limited to the amount “that can reasonably be considered to relate to the
amount owing from time to time during the year… to the institution under the borrowing”.

The “net cost of pure insurance” is determined using actuarial principles as described in the Income Tax Act Regulations (your insurance company should be able to provide you with this figure).

In terms of the amount “that can reasonably be considered to relate to the amount owing from time to time during the year” under the loan, the Canada Revenue Agency provides the following example:

Example

You have life insurance coverage under a policy where the death benefit is $500,000. You assign the policy as collateral to a bank for a loan to be used in your business.

The amount owing under the loan throughout the taxation year is $200,000. As such, the deductible amount is equivalent to 40% (200,000 / 500,000) of the lesser of the premiums payable for the year and the net cost of pure insurance under the policy for the year.

Last modified on May 20, 2020 12:00 am
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