Chen, a 50-year-old professional in Ontario, secured a $1,000,000 participating whole life policy 20 years ago. He is now considering taking a policy loan against its accumulated cash value to fund his child's education. What is an important consideration Chen's advisor must explain regarding interest payments on this loan under Canadian tax law?

Question: Chen, a 50-year-old professional in Ontario, secured a $1,000,000 participating whole life policy 20 years ago. He is now considering taking a policy loan against its accumulated cash value to fund his child's education. What is an important consideration Chen's advisor must explain regarding interest payments on this loan under Canadian tax law?

Answer options:

• Interest paid on a policy loan is generally tax-deductible if the loan is used for investment purposes.
• Interest paid on a policy loan is always tax-deductible as it is considered a business expense. ✅ Interest paid on a policy loan is generally not tax-deductible for personal consumption, even if the policy itself is tax-exempt.
• Interest on a policy loan is only payable if the market value of the investment options exceeds the loan amount.

Correct answer: Interest paid on a policy loan is generally not tax-deductible for personal consumption, even if the policy itself is tax-exempt.

Explanation: Under the Income Tax Act, interest paid on a policy loan is generally not tax-deductible if the loan is used for personal purposes. Deductibility typically requires the loan to be used for eligible income-earning purposes.