Taxation of Insurance Products Flashcards

Are life insurance death benefit proceeds taxable in Canada?

Answer: No, death benefit proceeds paid to a named beneficiary are generally received tax-free

Life insurance death benefit proceeds paid to a named beneficiary are generally received tax-free in Canada, which is one of the key advantages of life insurance.

How is the cash surrender value of a life insurance policy taxed when the policyholder surrenders it?

Answer: The amount exceeding the policy's adjusted cost basis (ACB) is taxable as income

When a policy is surrendered, the amount received in excess of the policy's adjusted cost basis (ACB) is taxable as income to the policyholder.

What is the tax treatment of disability insurance benefits in Canada?

Answer: Benefits are tax-free if the employee pays the premiums, and taxable if the employer pays the premiums

The taxability of disability benefits depends on who pays the premiums: employee-paid premiums result in tax-free benefits, while employer-paid premiums result in taxable benefits.

What is the 'capital dividend account' (CDA) and how does it relate to corporate-owned life insurance?

Answer: A notional tax account that allows corporations to distribute life insurance death benefit proceeds as tax-free capital dividends to shareholders

The CDA is a notional account that tracks the tax-free portion of certain receipts, including life insurance death benefits, allowing corporations to distribute these amounts as tax-free capital dividends.

How are critical illness insurance benefits taxed in Canada?

Answer: Benefits received under an individually-owned critical illness policy are generally tax-free

Critical illness insurance benefits received under an individually-owned policy are generally tax-free because the premiums were paid with after-tax dollars.

What are the tax implications of transferring a life insurance policy between spouses in Canada?

Answer: The transfer may occur on a tax-deferred rollover basis under specific Income Tax Act provisions

Transfers of life insurance policies between spouses can generally occur on a tax-deferred rollover basis, meaning no immediate tax consequences arise from the transfer.