A common question I will get during a review of permanent life insurance options is whether the insurance premiums paid are deductible for tax purposes. For those unfamiliar with permanent life insurance benefits, please review my article:
Seek Tax Advice
Below I’ve overviewed some of the general rules surrounding deductibility of life insurance premiums for information purposes.
However, please be advised before continuing in this article that only a public practice accountant should be provided you advice on whether any premiums paid by you or a related entity are deductible for tax purposes.
As part of my service to clients I will always work closely with your public practice accountant to assess tax deductibility for any of the strategies we are considering.
Capital in Nature – Not Deductible
Generally, life insurance premiums are not deductible for tax purposes as they are considered “capital in nature” for tax purposes. Unfortunately, the Income Tax Act (Canada) does not define “capital in nature”, and therefore this position is based on court proceedings and Canada Revenue Agency guidance. That guidance will generally state that anything that offers an enduring benefit is more capital in nature and therefore not falling under a current expenditure argument.
As permanent life insurance offers an enduring benefit, premiums paid into a permanent life insurance product will not fall under a current expenditure argument and will need to be accounted for as “capital in nature”. This will generally involve booking as an asset on the balance sheet the cash value of a permanent policy. To the extent the annual premium paid exceeds the increase in the cash value of the policy, there would be an accounting expense for the residual booked on the financial statements. However, this accounting expense would generally be reversed (or added back) on the entity’s tax return so that no tax deduction is taken in the year.
The result of the above accounting and tax treatment is to effectively treat the annual life insurance premiums as an asset for tax purposes.
Looking for Deductible Premiums?
There are certain circumstances, however, where a portion of the premiums payable for a permanent life insurance policy may become deductible for tax purposes. This is reserved for specific situations where the permanent life insurance policy is used as collateral to secure a business or investment purpose loan from certain financial institutions.
At MGF Advisory Inc, we help clients plan into these specific situations to get both the benefits of permanent life insurance and tax-deductible premium costs. Contact us for more information and to see if this planning may add considerable value to you.
This post was written by Marco Faccone