Can’t live with it, can’t live without it.
Do you own a business and pay for life insurance policies applicable to the business? You should know that in two particular situations the premium paid for these policies is a deductible expense for tax purposes according to the Canada Revenue Agency (CRA).
If you have employees and offer life insurance as a benefit, and if the life insurance payout is an unencumbered benefit to the employee and his or her family, and if your business pays the life insurance premium, then you can use the premium paid as a business expense.
The second situation is when a life insurance policy has to be assigned as collateral for a business loan. Whether a new policy is established or an existing one has its beneficiary re-assigned, the premium, or a portion of it, is deductible if the lender is the named beneficiary and the purpose of the loan is to earn income from a business or a property.
However, CRA has rules surrounding the allowable amount of the premium that can be expensed. CRA can require only the inclusion of the net cost of insurance based on mortality assumptions for the given year of coverage. In other words, it is a calculation using the probable risk of the person insured actually passing away during the given tax year. Not a simple calculation.
Not always required by CRA, but can be required in cases where the loan amount is very large with requisite insurance coverage demanded by the lender and consequent premium is of significant value. A particular poignant fact when the insured person is a very young.
In fairness to CRA, there is no cheating by the business owner assumed by CRA. The amount of insurance may very well be required by the lender. What this calculation attempts to allocate is a realistic value of the premium expense in terms of its current necessity.
A less complicated and more common adjustment to a life insurance premium for a business loan occurs when the death benefit out measures the amount of loan payout required itself. For example if a million dollar benefit covers a half million dollar outstanding loan balance. Fortunately this calculation is typically easy. CRA applies the ratio of payout to benefit against the total premium amount. In this example, only 50 per cent of the premium would be an allowable expense.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.