Taxation of Insurance Products Flashcards

What is the 'adjusted cost basis' (ACB) of a life insurance policy and why is it important?

Answer: A calculated tax basis used to determine the taxable gain on policy dispositions, surrenders, and loans

The ACB is a calculated value used to determine taxable gains when a policy is surrendered, transferred, or a policy loan exceeds the ACB, making it a critical tax calculation.

How does the Income Tax Act define an 'exempt policy' for purposes of tax-sheltered accumulation?

Answer: A policy whose accumulating fund does not exceed the accumulating fund of a benchmark endowment policy

An exempt policy is one whose accumulating fund does not exceed the benchmark test, allowing investment income to grow tax-sheltered inside the policy.

What are the tax implications of a policy loan from a life insurance policy in Canada?

Answer: Policy loans may trigger a taxable disposition if the loan amount exceeds the policy's ACB

A policy loan may create a taxable disposition if the total indebtedness exceeds the policy's adjusted cost basis.

How are employer-paid group life insurance premiums treated for tax purposes in Canada?

Answer: Premiums paid by the employer are a taxable benefit to the employee for coverage exceeding certain thresholds

Employer-paid group life insurance premiums are generally a taxable benefit to the employee and must be included in their income for tax purposes.

What is the tax treatment of annuity payments received from a registered plan (RRSP or RRIF)?

Answer: They are fully taxable as income in the year received

Annuity payments from registered plans (RRSP/RRIF) are fully taxable as income because the contributions were tax-deductible when made.

What tax advantages does a Tax-Free Savings Account (TFSA) offer compared to using life insurance as a tax shelter?

Answer: TFSA contributions are not deductible but withdrawals are tax-free; life insurance offers tax-deferred growth with a tax-free death benefit but taxable surrenders

TFSAs provide tax-free growth and tax-free withdrawals, while life insurance provides tax-deferred growth inside the policy and tax-free death benefits, but surrenders may be taxable.