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- From a tax perspective, life insurance is neither capital property nor debt instrument. It’s governed by a special set of rules in the Income Tax Act and accompanying regulations. First, life insurance premiums, whether paid personally or by a corporation, are typically non-deductible, resulting in premiums being funded with after-tax dollars.
www.advisor.ca/insurance/life/how-life-insurance-is-taxed/
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Apr 21, 2022 · LIFE OR HEALTH INSURANCE OWNED BY AN EMPLOYEE, WITH PREMIUMS PAID BY EMPLOYER. For individuals: No. Premiums paid by the employer are a taxable employee benefit. For businesses: Yes, as long as the premium payments are a reasonable business expense.
- Dave Dineen
- Individually owned policies premiums/deposits
- Investment income tax
- Policy dividends
- Death benefit
- Adjusted cost basis (ACB)
- Net cost of pure insurance (NCPI) for policies issued after December 1, 1982
- Policy surrender
- Partial surrender (withdrawal) of cash surrender value
- Policy loan
- Corporate owned policies
- Capital dividend account (CDA)
- Partnership owned policies
- Trust owned policies
- Non-resident owned policies
- Ownership transfers
- Employee/shareholder benefits
Generally, premiums are not deductible to individuals. There are two exceptions to this general rule for individuals. Where a registered charity is the owner and beneficiary, the premium paid by the taxpayer is considered to be a charitable donation eligible for a charitable tax credit, subject to the usual restrictions on amounts. A portion of t...
The Income Tax Act imposes a corporate tax called the Investment Income Tax (IIT) to the insurer. The IIT rate is 15% of net investment income. It is not a tax directly payable by the policyholder. But, IIT effectively reduces the rate of internal growth in the policy and requires an appropriate premium adjustment to fixed premium, fixed value po...
There are numerous rules in the ITA about taxing of dividends from participating life insurance policies. Indeed, most of the ITA that applies to life insurance was crafted with participating insurance in mind, before the days of universal life. Where dividends are received in cash or paid out of the policy but left to accumulate with interest, all...
The beneficiary receives the death benefit of a Canadian life insurance policy tax-free. There are a very limited number of exceptions to this general rule. Following are the two principal exceptions: A ‘non-exempt’ policy is subject to taxation on the growth in cash value in excess of the growth in adjusted cost basis (ACB) of the policy (‘accrued...
The cost of an insurance policy for tax purposes is the Adjusted Cost Basis (ACB). There are numerous factors that increase or decrease the ACB. The most common are premiums and the Net Cost of Pure Insurance (NCPI-see below). ACB is increased by the total of all premiums paid and decreased by the annual NCPI. Other factors that increase the ACB in...
NCPI for a given policy year equals the net amount at risk (essentially total policy death benefit minus total cash value) multiplied by the prescribed mortality rate for the life insured’s current age. The NCPI is equal to the mortality charge for the pure insurance element of the policy.
When a policy is surrendered or ‘cashed in’, there will be an income inclusion for the policyholder equal to the cash surrender value less the ACB.
In the case of a partial surrender, the amount of the withdrawal that is taxable is proportional to the ratio at which the total cash surrender value would be taxable on surrender.
Loan proceeds are first received from the ACB of the policy and then from the gain portion of the cash value. This means that amounts up to the ACB can be borrowed without any tax consequences. When policy loans are repaid, the policyholder is eligible for a tax deduction up to the amount of taxable income previously included in income.
The same rules apply to corporate owned policies that apply to individuals for premiums/deposits, investment income tax and policy dividends. Death benefits however have a special set of rules.
Like individuals, a corporation that is the beneficiary of a life insurance policy will receive the death benefit free of tax. To allow for proper tax integration, Canadian private corporations can use a notional account called the Capital Dividend Account to flow tax-free receipts through to shareholders on a tax-free basis. On death of the life i...
Essentially the same rules apply to policies owned by a partnership. A similar mechanism to the capital dividend account exists for the death benefit received by a partnership. The cost base for tax purposes of the partnership interest is increased by the difference between the death benefit and the policy’s ACB.
A trust, as owner of a life insurance policy is taxed in the same manner as an individual owner on death benefit and policy dispositions. Generally a life insurance policy owned by at trust can be rolled out to a beneficiary of the trust at cost (ACB), meaning no tax would be payable until a subsequent disposition.
There is a significant distinction to be made between a Canadian resident who purchases a policy and subsequently becomes non-resident and a non-resident who purchases a policy from a Canadian insurer. Similarly, there is a significant difference depending upon whether the life insured was resident in Canada at the time the policy was issued. Where...
The taxation on the transfer of ownership depends on the relationship between the transferor and the transferee. In the case of some non-arm’s length transfers, the intent of the two parties may also be a factor. As a general rule, a transfer of ownership is a policy disposition. The original owner will include the policy gain (transfer price less ...
Where ownership of a policy is transferred from a corporation to an employee or shareholder, not only will the corporation have to include any applicable policy gain from the deemed disposition of the policy, but there may also be a taxable benefit inclusion in the income of the transferee. The amount of the benefit inclusion will be the fair marke...
Sep 25, 2020 · As an individual, when you pay life insurance premiums, they are not deductible on your income tax return. However, if you are a business owner and you pay life insurance premiums on behalf your employees, your expenses may be deductible. Here’s a look at what the Canada Revenue Agency (CRA) requires: Deductible Employer-Paid Life Insurance ...
Jul 6, 2023 · For the most part, there is no sales tax on Canadian life insurance premiums, which means that they are not subject to either the Harmonized Sales Tax (HST) or Provincial Sales Tax (PST). For a while, Saskatchewan was an exception to the rule.
Sep 21, 2017 · It’s governed by a special set of rules in the Income Tax Act and accompanying regulations. First, life insurance premiums, whether paid personally or by a corporation, are typically non-deductible, resulting in premiums being funded with after-tax dollars.
Mar 11, 2024 · Life Insurance Premiums and Tax Deductions: Generally, life insurance premiums are not deductible on personal or corporate tax returns. However, exceptions exist, such as when a policy is used as collateral for a loan or when borrowing against the policy's cash value for business purposes.
Unfortunately, the Income Tax Act and similar regulations don’t allow individuals to claim a deduction on life insurance premiums from their taxes—with an exception. That’s because the government classifies life insurance policies as personal expenses.
