Interest expense on Seg Fund

Tax Topics
1

I got a weird one, or at least weird to me, I was asked by a new client if interest paid to purchase seg fund is deductible,

Initially, I thought interest can be deducted if there is earned income, interest or some kind, but he said his financial advisor said, interest on funds to acquire seg fund is deductible, and doesn’t have to have income. I could not find any CRA source, but after some digging, found this section from manulife said that.

Interest incurred to purchase a segregated fund policy

As indicated above, interest on funds used to acquire a life insurance policy won’t be deductible. However, the Income Tax Act (Canada) provides an exception if the borrowed money is used to purchase a non-registered segregated fund contract.³ Under these circumstances, interest on borrowed funds is deductible.

Anyone with more knowledge can share?
https://www.manulifeim.com/retail/ca/en/viewpoints/tax-planning/tax-deductibility-of-interest-on-an-investment-loan

2

I think he’s referring to the general rule that interest PAID on money BORROWED to earn taxable income is deductible - per ITA 20(1)(c):
https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plan-folio-6-interest/income-tax-folio-s3-f6-c1-interest-deductibility.html

That rule has been applied very broadly in practice - to deduct against income from business or property. The tax court (and CRA) has been more strict in the last few years, about following the stipulations of that section of the act. For instance, if you refinance the mortgage on a rental property, you’re not actually “borrowing to invest”, so then the interest would not be deductible. (Though, in practice, a lot of taxpayers still do it, and never get caught…)

Not sure if the rules treat “seg funds” differently than any other investment.