Is life insurance taxable in Canada?

• Death benefits to a named beneficiary are generally not taxable income to that beneficiary.
• Naming a beneficiary usually keeps proceeds out of the estate, which can reduce probate exposure.
• Surrendering a policy or withdrawing cash value can trigger a taxable policy gain.
• Personal life insurance premiums are generally not tax-deductible in Canada.
• Corporate ownership introduces capital dividend account and shareholder-benefit considerations.

Where a beneficiary is named on the policy, the insurer pays that person directly. The amount is generally not included in the beneficiary's income. If the estate is the beneficiary, the proceeds flow through the estate, may be exposed to probate fees and creditor claims, and are distributed under the will.

A permanent policy's cash value grows on a tax-deferred basis within limits set by the Income Tax Act. Surrendering the policy, taking a withdrawal, or a policy loan exceeding the adjusted cost basis can produce a taxable policy gain reported on a T5. The mechanics vary by policy and insurer.

When a private corporation owns and is the beneficiary of a policy, the death benefit above the policy's adjusted cost basis is generally credited to the capital dividend account, allowing a tax-free capital dividend to shareholders. Premiums are generally not deductible. Ownership structure, shareholder agreements and CRA rules must be reviewed with an accountant.

• Tax outcomes depend on policy design, ownership, beneficiary designations and current legislation.
• Quebec uses different civil-law concepts for designations and estates.
• Nothing here is tax advice; confirm treatment with a Canadian accountant or tax lawyer.

• Income tax information for individuals — Canada Revenue Agency
• Life insurance — consumer guidance — Financial Consumer Agency of Canada
• Life and health insurance in Canada — industry resources — CLHIA