A Life insurance policy that qualifies under section 148 of the Income Tax Act, is an excellent planning tool that can be used to create a growing tax advantaged account. This account is totally accessible and under your control while you are alive, (subject to the collateral assignment to the lender) and is paid out to cover the amount of the loan at death. Any remaining balance not required to pay of the loan obligation, will be payable to your beneficiary. This means you not only achieve a tax deduction for the cost of the insurance coverage, but you avoid paying income taxes on the growth in the account as well!
(C) AccesDirect. All rights reserved.
Where a life insurance policy is required as security against a loan by a lender, a degree of tax deductibility may be claimed by the borrower in respect of the annual cost of acquiring that coverage according to a Revenue Canada approved table of mortality rates that are multiplied by the net amount at risk for the year (Estate Value minus Fund Value). The deductible "Net Cost of Pure Insurance" (NCPI) is either the result of this calculation, or the actual annual mortality charges paid on the policy whichever is the lesser.
(C) AccesDirect. All rights reserved.
In order to obtain the tax deduction, the situation must meet certain requirements:

1. The policy must be assigned to the lender;
2. The lender must be a corporation whose principal business is the lending of money or the purchasing of debt obligations;
3. Generally speaking the interest payable in respect of the debt would be tax deductible in computing income for the year;
4. The assignment must be required by the lender;
5. The deduction is limited by the amount owing from time to time during the year. Therefore both the size of the policy and the size of the loan must be considered in the calculation.

Additional information may be obtained from Revenue Canada's Technical Amendment of 13 July 1990 and Interpretation Bulletin IT309R3.
(C) AccesDirect. All rights reserved.