LLQP Taxation of Insurance Products 2

Question 1

Are life insurance death benefit proceeds taxable in Canada?

Accepted Answer

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

Answer

Yes, they are fully taxable as income to the beneficiary

Answer

They are taxable only if the benefit exceeds $500,000

Answer

They are taxable only in the year following death

Question 2

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

Accepted Answer

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

Answer

The full surrender value is tax-free

Answer

Only the first $10,000 is taxable

Answer

Cash surrenders are never taxable in Canada

Question 3

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

Accepted Answer

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

Answer

All disability benefits are tax-free regardless of who pays the premiums

Answer

All disability benefits are fully taxable

Answer

The tax treatment depends on the amount of the benefit

Question 4

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

Accepted Answer

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

Answer

A bank account where corporations store capital

Answer

A CRA account tracking corporate dividend payments

Answer

A fund that insures corporate capital against loss

Question 5

How are critical illness insurance benefits taxed in Canada?

Accepted Answer

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

Answer

They are always taxable as income

Answer

They are taxed at a flat rate of 25%

Answer

Only benefits over $100,000 are taxable

Question 6

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

Accepted Answer

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

Answer

There are no tax implications; transfers between spouses are always tax-free

Answer

The transferring spouse must pay capital gains tax on the policy value

Answer

Spousal transfers of insurance are prohibited under Canadian tax law