Leveraged Supplementary Retirement Account - Standard Life

Leveraged Supplementary Retirement Account
Deductibility for tax purposes
General Anti-Avoidance Rule (GAAR)
Conclusion
In cases where a business leverages the life
insurance policy, one must look at the facts on
a case-by-case basis to determine if interest will
be deductible.
On October 31, 2003, the Department of
Finance introduced proposals relating to
interest deductibility. If a deduction is to be
sought for the interest paid on any borrowings,
the borrower should consult their tax advisor
as to the impact of these proposed rules. For
additional information on this topic, please refer
to the Taxing Issues document entitled, “Interest
Deductibility” (PC 6141).
Deductibility for tax purposes of life
insurance annual premiums
A policyholder may be able to deduct all or a
portion of the life insurance premiums where
the policy is used as collateral, provided that
the policy is assigned to a restricted financial
institution, the interest incurred on the loan
is deductible, and the restricted financial
institution requires the policy as collateral.
The amount deductible is to be capped at the
lesser of the premiums payable in respect of
the year, and the Net Cost of Pure Insurance
(NCPI) for that year. It will also need to be related
to the amount owed versus the life insurance
coverage amount.
For additional information on this topic, please
refer to the Taxing Issues document entitled,
“Leveraging Life Insurance Policies” (PC 6244).
General Anti-Avoidance Rule
(GAAR)
Subsection 245(2) of the ITA contains a provision
called the General Anti-Avoidance Rule (GAAR).
The provision allows CRA to recharacterize a
transaction if the transaction is a misuse or
abuse of the provisions of the Act. If CRA applied
GAAR to leveraged insurance transactions, it
might attempt to recharacterize the loan from
the financial institution as a policy loan. If it is
deemed to be a policy loan, amounts in excess
of the policy’s adjusted cost basis would be
taxable. It is arguable that GAAR should not
apply to recharacterize the loan. One argument
is that a policy loan is defined in the Act to be an
amount advanced by an insurer in accordance
with the terms of the policy. Since the insurer is
not advancing the funds in accordance with the
terms of the policy, the transaction should not fit
within the definition of policy loan.
Conclusion
As with any investment option, it is important to
review both the risks and rewards. In the right
situation, an LSRA can provide additional cash
flow in retirement and provide permanent life
insurance for the individual’s beneficiaries.
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