Investing with Whole Life Policy Loans in Canada Interest Deductions

If you have multiple policies, maybe you're flowing some of your business through the life insurance company, flowing some of it through the commercial bank, or you're just selecting one or the other. It's just great to have options. And if you're going with the life insurance company, you know, there's no qualifying process, there's no income verification, there's no credit check, there's no lengthy, nosy credit application, anything like that. It's ridiculously simple. Is policy loan interest tax deductible in Canada? And this question comes up especially when we're discussing the topic of becoming your own banker, the infinite banking concept for Canadians. And let's dive right into a scenario where you have a participating policy owner. They have an accumulation of cash value, which also creates a loan amount available. Because inside the contract, the policy owner has a guaranteed loan provision. So the policy owner can request a policy loan from the life insurance company. Policy owner has $100,000 in accumulated cash value, a $500,000 death benefit, and a loan amount available of 90,000. The policy owner requests the loan, the insurance company issues the loan. All of the 100,000 in accumulation of cash value still continues rising every day. Inside the policy, the loan requested was $50,000. So a $50,000 lien is placed on the death benefit of the policy, and the policy owner controls the repayment schedule of the loan. So it's an unstructured loan. The policy owner utilizes that money to invest in some opportunity, maybe a piece.

Of real estate, some opportunity mortgage funding, a second mortgage or whatever it is, renovation, clubhouse, renting, running it into your own corporation so that, you know, generating profit.

Yeah, like the, you know, in order for that simple interest that accrues on the policy loan. Because the moment that the loan is issued, simple interest begins occurring. Capital always has a cost, and you're actually paying, so you're making repayments back to the life insurance company. If your motive for the use of that $50,000 was to produce a taxable gain or taxable income, then you can legitimately, you can legitimately take that into account when you file your tax return, and you can deduct that, you know, personally. And now, full disclaimer here. We are not chartered accountants. We're not providing you with any tax planning or tax advice. We're just walking you through the process. We're walking you through what, what the structure of that is and the legitimacy and, and that sort of thing. But always consult with your chartered accountant. Talk to your designated tax professional. If you're seeking Tax advice and tax planning. Now, what I wanted to say is.

That.

There'S two, there's two tracks here that a person can go down, right? A person can utilize the life insurance company's money through the request of a policy loan, or the person can collaterally assign the policy to a commercial bank and use the commercial bank's money to take advantage of that investment opportunity. Here's the difference between those two tracks. If you write, if you take a personal deduction on that simple interest that you paid to the life insurance company and you file the correct T form that accompanies your tax return, that amount of interest that you paid back to the life insurance company does not increase the adjusted cost basis of the policy. Whereas if your policy is collaterally assigned with a commercial bank and you still meet the criteria of personally deducting that interest that you paid, well, the adjusted cost basis of your policy is not impacted at all because the money didn't come from the life insurance company. And so it's making that determination of, you know, what track you choose to go down. And that, you know, decision is best when you've, again, you've consulted with all of the professionals that are helping you in your, in your planning. Does that make sense, Rich?

Yeah, it makes sense. And I, so, I, so let's frame that up a little bit more. Let's, let's put some, let's, let's round the edges a little bit more for folks because, you know, you, this might be your very first episode and you're like, just a cost basis. We, what's that? You know, what is that? So we, we, we do have another episode where we talk about things like the adjusted cost basis. In fact, episode 100, we did an entire thing talking about policy loans and a little bit about the adjusted cost basis and some other, like, key terminology of an insurance, the anatomy of an insurance contract and certain taxable events that occur. So that would be a good episode to reference. But when, when we're talking about this here, why is it important to understand that? So if we do, as Jason said, we took the loan from the life company contractually obligated to do that. It's an unstructured loan, which means there's no requirement for repayment. However, you, the policy owner, you are the banker. You have to make that loan repayment. You have to set that up and you have to be accountable to it, because you have to be accountable as a banker. You have to be an honest banker. If you want to write interest off. Can you write interest off that you have not paid. No. The answer is no.

Which means you can't do it in any structure.

In any structure, yeah. So because the insurance company isn't requiring a repayment, the diligence and the requirement for you mentally as a policy owner to commit and make that interest payment, at minimum, an interest only payment back to life company so that that interest is paid in the calendar year. Not the policy year, the calendar year. So the calendar year ends on December 31st. If your policy anniversary date is June 1st, then those two things don't line up, the policy anniversary and the calendar year. So tracking is important. You have to do that as a policy owner. You're the banker. You also need to make sure that the interest that you're trying to write off, if that is your objective, must actually be paid. You can't write off something you haven't paid. So this is where people can create compound problems over time if they aren't diligent on these types of steps. And so if you want to write that interest off, because that's your objective, you absolutely can do it. It's in the how do you do it? That actually matters. So the devil's in the details on this particular one. So it must be paid in the year, in the calendar year. And now you have to fill in a T form must be completed. It's a T2210 T22 form. It's the verification of policy loan interest by the insurer.

And we'll put a link to that form in the show notes.

So, so you're the insurer is then getting notified, hey, you know Bob Jones over here, he's writing off $3,000 of policy loan interest. He says he paid it. Like, can you make that adjustment? So in other words, if you're getting a benefit on this side in this calendar year, you're getting the benefit of the deduction. Then the advantage of that increase the adjusted cost basis that you might have otherwise had. If you, if you left it with a life company, you didn't write it off. You don't get it there. So it's, it's basically, it becomes an even situation to a degree. Now here's where people get into, I think, I think they get into some, some, I don't know, I want to say risk potential, but they get into some mental barriers a little bit with the third party lender. Jason's talking about a collateral assignment here. If we were to take the policy, which we have control over, and we collaterally assign that policy to the third party commercial bank and they issued us a cash surrender value line of credit. Okay, they have, there's specialized lending products designed for this. Not every bank just, you just walk into a bank and be like, oh yeah, I want one of these. And they'll give it to you. Like you work with, you're an advisor who understands. They'll help you connect the dots in this, this environment. So you get the $50,000 line of credit now with, you know, ABC Bank. Well, ABC bank, if you borrow that $50,000 and you go and now chunk it into the, the investment deal or whatever that profit generating activity was going to become, they're going to require an interest only payment on that credit line, if any. They have no sense of humor about it at all. It's, it's, it's not something that they're going to be like if you don't, if you miss the payment, they're like, oh well, hey, Bob's a nice guy, we'll get that on the back end, no big deal. No, they're, they're going to start getting you sending you nasty letters. They're going to call you, their credit department is going to wonder what's going on, do we need to call this loan due? Like you're going to get into some hot water. So if they're going to have that type of rigid mentality over the line of credit, their money that they're letting you use, shouldn't you have the exact same banker's mindset rigid mentality on your money that the insurance company is letting you? You know, the insurance company's money is letting you use and you're part of that co ownership pool. So you have to treat this the same way that a bank would treat it. If you do not, you are going to unintended consequences.

Well, and you're just saying, hey, come audit me.

Yeah, I'm doing something that a fraction of the percentage of Canadians do. And yeah, like you put yourself in under the microscope and what we're getting at is you can absolutely write off the interest on a policy loan, but you do need to be mindful and diligent and you need to know what you're doing. And for some people the extra amount of that effort or the extra amount of I guess, control requirement, like for, for some individuals they might just say, look, I got this deal, I'm happy with the deal, the deal is profitable enough. I don't even care about the interest write off. I just want to do the deal and I want to have control Yeah, I place a higher value on control, on autonomy, on the deal, than I do in the small potential of an interest write off that I might get. In other words, there's an expression, tripping over dimes to get the dollars. You ever heard that one, Jason?

Yeah.

And you know, so for many people, depending on what stage of life they're at, this is a situation where you're tripping over dimes to get dollars. Because what's more fundamentally important is the control that you can have. And you know, as an example, you have a person who, they want to do a deal. Maybe it's a flip deal on a piece of real estate. Well, on a flip project, you know, the money's probably not going to be tied up for too long, maybe three months, maybe six months, maybe nine months. You're looking, you're hoping for an exit. You're going to refi the property and do an equity takeout, or you're selling the property and you're exiting your profit. Well, you might want to have the unstructured loan potential of a policy loan where there's no requirement for a repayment. And then when the deal's done, you take the money that you took out of the life company and you put it back, plus whatever interest is owed to the life company, plus if you're an honest banker, some more, and ideally that's earmarked for a new policy or what have you, or a policy in your system of policies. And then you take your remaining profit and geez, you wait for the next deal and you lather, rinse and repeat that process. If it was successful and you liked what you did and you feel like you could do another one and be successful at it. But that way you're not worrying about all the Mickey Mouse paperwork and necessity of making an interest only payment and having all this kind of minutiae dealt with. Because you just want control over your capital. You want to be able to do what you want to do with a profitable deal. When the deal strikes your desk and you could pounce on it, you know, like a, like a lion and be like, I got it. I want that deal.

Put me in the game, coach. Yeah. And you know, being, being in a position of total control is, it not only, you know, just creates that feeling.

Of.

Certainty and confidence, but there's advantages to being in control, you know, versus if you're, if the option is there, you can, you can deal with someone else's bank. And when you're in that situation, you're just not in a Position of total and absolute control. And you just have to reckon with that, you know, I mean, you'll still have access to capital. Commercial banks love collateral assignments because the commercial bank knows that the life insurance company itself is guaranteeing the collateral for the loan. And that collateral is only going to become more valuable every single day. The bankers know that. And so your option, it's, it's great to have options where you can go, hey, I can go down this track or I can go down this track. It. It's just important to know what set of tools you have at your disposal based on the track that you decide to go down. And we have clients who go in both directions, and that's completely okay.

And it's not like you're making a hard, fast rule that this is the only direction you're going. Like, you may do that. I mean, it's your capital, it's your policy. You're the owner, you decide whatever you want to decide. That's part of the empowerment that we're trying to provide through this podcast and through our other media and mechanisms and training that we do in our, you know, our ongoing client coaching sessions and all the information we have in our membership portal for our clients. This is all stuff that we're putting in place so that you can be empowered to make these as you can have the information on hand so that you're making an informed decision about what's the right path for you. But here's the thing. Paths change over time. Things show up in our life that give us pause and give us, oh, you know what, hey, based on what's now in front of me, what's changed? I might consider this instead of this and understand that banks use other banks all the time. Right. And so if your capital is safe and building and protected and growing inside the insurance company, and if you want to use the insurance company's capital before all the control features and mechanisms which, you know, we recommend, we promote. And if, and absolutely you should be starting there at some future point, if it's sensible or reasonable for you to look at, you know, pledging the collateral, assigning that collateral to a third party lender, there might be a very strategic reason for you to do that. You get to make that decision. But here's the key thing to be aware of. So let's. Jason's same example. We've got a $500,000 death benefit. There's 100,000 in cash value. Person's taking a $50,000 policy loan. Okay, well, let's assume that we did the third party collateral difference. We went with ABC Bank. Instead we went and got a $90,000 credit line issued and we're going to use 50,000 of the capital, but we still have access to the room the same way we would have with the life company. So very kind of very similar structure, very similar circumstances. We must make a minimum interest payment. In fact, the bank is going to do the accounting for you and they're going to even send you a statement so they simplify some of that. But there's the requirement of that minimum payment. That's got to happen. It's got to be there in that situation. Well, this is what I think is interesting is that heaven forbid something shifts or changes. Let's say two or three years go by, you've been using that credit line at ABC bank and everything's been going, you know, tickety boo. It's all working out fine. We're writing off interest, we're finding some deals and boom, boom, boom. Everything's going well. All of a sudden things aren't going well. Something changes, There's a market shift. Real estate values change, interest rates go up. Any number of things can happen. All of a sudden it's no longer makes sense for you to continue doing business with that bank. Maybe they've made a change at the bank. Interest rates have spiked and they're asking you to provide some more paperwork. You're frustrated with the process and you just say, no, I'm done with you guys. I don't want to deal with you anymore. Well, all of your capital is still at the insurance company in the cash value bucket. You can say, hey, insurance company, here's what I'd like to do. I want a direction to pay. I want to take a policy loan. I'm going to get these guys to sign off on it because they have the collateral assignment. And we're basically going to do like in real estate. They would refer to it as like a simultaneous close. We're just going to swap places. I'm going to use the go back to deal in business with the insurance company and I'm going to get them to pay you guys out and I'm going to wave goodbye. See you later, thanks for all your help. But you're out. And then you're doing your business with the life company again. So you still do have that power and the control. There's just a, you know, some, a set. There's, there's going to be some effort involved and you need to actually get a, you know, a written letter of direction to that that indicates what's happening because the, the bank, ABC bank is not going to release their collateral until they've got the funds back so that, that there's a way that that process has to happen so that it, it happens in the right sequence of operation.

For sure. Yeah. Really good to, to address that. And again, it all comes back to the strength of the underlying asset. Strength of the asset. And if a commercial bank is going to lend a maximum of 100%.

Of.

The total cash value of a policy and they won't go anywhere near 100% on a piece of real estate even if it's, even if fully, even if it's fully unencumbered, like there's no, you know, no outstanding debt or liens on the property, then it begs the question, what does that tell you about the strength of the asset in the eyes of the banker and what a great position to be operating financially from where you know that you can get ready access to capital from not one, but two different sources. You can get it either from the life insurance company or from a commercial bank, or, or both. If you have multiple policies. Maybe you're flowing some of your business through the life insurance company, flowing some of it through the commercial bank, or, or you're just selecting one or the other. It's just great to have options. And if you're going, you know, with the life insurance company. Right. You know, there's no qualifying process, there's no income verification, there's no credit check, there's no lengthy nosy credit application, anything like that. It's ridiculously simple.

So simple.

If you're dealing with a commercial bank, the commercial bank, you know, would, would have criteria based on, hey, what percentage are you looking for? With some lenders, if it's 75% or less, no qualifying required, you just need to have clean credit report and you're good. You want to go to 100%, it's full underwriting like they're going to firstborn child give you a financial proctology exam.

Yeah. How many tax, you know, past tax returns can you, you know, spit out of your, your filing cabinet? And you know, whatever, like it's. And so again, it's. Everything comes at a, some kind of cost. Well, it's the, it's the cost of doing business. It's the cost of your time and your energy and your effort. And it's also the cost of the frustration. So anyone who's listening to this, you know, raise your hand if you've had some Frustration dealing with a bank going and applying for some like a mortgage loan or you know, we got a lot of real estate investors, like you got to have a binder with everything under the sun. And if you're trying to move at speed and you're trying to do a lot of deals, man, that can be a very taxing, frustrating process of document tracking. And then just when you think it's all good and they got everything, oh wait, they want one more thing. Oh wait, they want one more thing. And like that's taxing it. It sucks away energy out of our life. And so that's the control we're talking about. It's the, it's the peace of mind and the knowledge that you just don't have to deal with any of that crap because you have control now. You have a person that's got a policy and they can make the decision of doing the, doing the business with the collateral loan for the third party bank or doing with the life company. Then you have the person that has, doesn't have the policy and they have to all their business with this bank and they have to go through all those frustrations every time. All the, they have no choice in the matter because it's the only place that has a reservoir of capital, a pool of money that is available that if you meet their requirements, you can tap into. That's all fine if everything's good. But we have good times and we have bad times. And while we're in good times, everything is good. But you know, bad times are going to be around the corner. Sooner or later the bad times will show up. Do you want to have a warehouse of capital built, protected, ready to go, preserve that you've been accumulating in good times so that you can access and do things, find opportunities, take care of crap that shows up in your life in bad times. Well, last two years for a lot of people because of this Covid business has been some bad times for some folks. Thankfully, the ones that have built a warehouse of capital, they have the ability to weather those bad times. Contrast to someone who does not. Not the same story, Not a good situation. And you know what? You know a bank won't lend you any money when you don't have your job temporarily or your business is shut down temporarily because you have no ability to make the repayments. Banks don't want to lend money in those situations. Isn't that funny?

Imagine that. No sense of humor.

None at all. And you know, and then if you've got a loan already in place and then you're not making payments. You know, geez, you're not too fond of that either. And if you don't have a capital reservoir that you've built up in a safe, secure, constantly accumulating place of financial value, which you can do when you implement this process, then all you're doing is shooting yourself in the foot. Because sooner or later the market, the economy, something in your wheelhouse will shift and the bad times will show up. And you want to be positioned for bad times so that you can weather them effectively and actually increase value, grow profit in them effectively if you're. If you're around the right community of people who recognize and understand when those opportunities arise. And then. So. So there's. There's just so much more. There's so much more to having one of these high quality insurance policies than just the policy itself. It's all the ancillary things. It's the. We talked about a peaceful, stress free way of life. Well, consider the points in your life that are not peaceful and stress free. How many of those have to do with your financial baggage and dealing with third party banks and stuff? Well, just rank list them. How. How many of those things have happened in the past? Okay, well, if it's happened in the past, what's the chance it could happen again? Do you want to mitigate that by building your own warehouse of wealth and becoming your own banker? That's it. It's not. It's not complicated.

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Any final thoughts on this, Jay? I mean, is there anything you think we missed out about this? I mean, the summary point is you can write off interest whether you're doing it from a third party bank or the policy loan. Yep. It's going to require some effort either way. Either the effort to go get the third party bank situation set up and deal with it or some effort in tracking and managing and making sure you're paying the interest and recognizing the timing of policy loan versus this. And like the insurance company is not bank. That's not their job. They're not sending you interest statements. That's not what they do. Don't have that expectation because that's just, that's not their function. They're there to make sure they provide death benefits. You're the banker, not them. They're the insurance company. They administer everything. They do a really good job. They got a boatload of capital. They. We have another episode that we just did about capital adequacy and how, how insurance companies are protect everyone's, you know, protect everything. So that's another good one to tune into. But recognize that you, you can't escape effort. Things that are worth doing are worth doing right. And if you want to be going and investing capital in anything and you want to be writing interest off for it, well, I don't care which direction you're going to go, there's going to be some effort required to make sure you do it right. And you don't put yourself on the hot seat when the audit shows up on your door and they're knocking and say, hey, we want to open up every filing drawer that you have and look at all your documents and your paperwork and we have a bunch of questions for you. Right. Make it easier on yourself going into the deal by making an intentional plan and doing it correct.

Love it and would encourage people as we always do. If you are on the YouTubes, take a look at the playlist. Poof, it just showed up. Isn't that awesome? It just showed up. And that playlist is a journey that we would encourage you to continue on and keep expanding your awareness, your knowledge of the infinite banking concept for Canadians. And if you want to take a, take a little ride over to Seven Steps ca, there's a great little report there that you can download and you'll be glad you did. So thanks again for, for tuning in. We, we appreciate you and make the rest of your week great. This was awesome, Rich. Thanks for the conversation.

Peace out, brother.