Is Life Insurance Taxable In Canada?

is life insurance taxable in canada tax policy

Life insurance is a financial product that can help ensure your family or other beneficiary have an easier time upon the event of your death. But will your beneficiary receive the full amount of your death benefit? Or does tax have to be paid on your death benefit? In this article, we’ll answer these questions and more. So, if you want to know more about paying tax on your life insurance in Canada, read on: 

How Can Life Insurance Be Taxable? 

In Canada, most insurance is thought of as being non-taxable, which is advantageous, since you can be sure that your beneficiaries will get the full death benefit. This is what most people mean when they refer to life insurance as non-taxable. And life insurance is usually non-taxable regardless of the policy’s size, whether you take it out with a partner, and whether you’ve named anyone else as a beneficiary. As well as this, both permanent and term life insurances are non-taxable, so you don’t have to choose between them for this reason. And when your life insurance is non-taxable, you don’t need to report your death benefit’s interest on your annual tax return, which makes things simpler. But, there are some situations in which life insurance does get taxed. 

When Will I Need To Pay Taxes On My Life Insurance? 

It is very uncommon to have to pay taxes on your life insurance. However, there are a few scenarios in which this could occur, so it’s a good idea to be aware of these situations so that you can foresee them, which is why we have written about them below: 

What If I Don’t Have A Beneficiary? 

Most of the time, people appoint a beneficiary to their life insurance policy. This can be their spouse, child, or even a charity or other organisation. The beneficiary inherits a person’s death benefit. But sometimes, people die having never appointed a beneficiary to their life insurance’s death benefit. When this happens, your estate automatically becomes the beneficiary. But when your estate is your death benefit’s beneficiary, your death benefit is then subject to tax. So, if you want to dodge having to pay tax on your death benefit, be sure to appoint a trustworthy beneficiary. 

What If I Sell My Life Insurance Policy? 

Did you know that you can sell your life insurance policy in some parts of Canada? These include Saskatchewan, Nova Scotia, New Brunswick, and Quebec. In this situation, whoever buys your policy will get your death benefit and premiums. However, the money you receive from the sale of your policy will sometimes have to be taxed. But, this depends on the type of insurance policy you sold, whether the policy had any cash value, the amount you received when you sold it, and how much money you paid into it when you had it. 

What If I Use My Life Insurance Policy As Collateral? 

Did you know that you can use your life insurance policy as collateral for loans? Then, if you die, the provider of your loan will pay the loan off using your insurance policy’s death benefit. But, your family - or whoever the beneficiary of your insurance policy is - will have to pay taxes on any outstanding loan balance that exceeds the amount you have paid into the policy. 

What If I Have A Cottage? 

If you have a cottage or vacation property, did you know that it is seen as being an investment property? This means that you will have to pay capital gains tax on your second home. In Ontario, capital gains tax is approximately 25%. 

If you have a cottage, you will need to think about this, and plan how you are going to pay the tax. Check out WEALTHinsurance.com to learn more about capital gains tax on cottages. 

How Can My Family Benefit From Tax-Free Life Insurance? 

Taxes are annoying because they take away some of the money you feel your family should be getting. Thankfully though, your death benefit will be non-taxable in the vast majority of situations, and the full amount of your life insurance policy will be tax-free when paid out. 

Whereas, with certain other investments, like RRSPs or real estate, the beneficiaries are expected to either be taxed on the estate or to pay the taxes themselves. 

So, it pays to have a non-taxable life insurance death policy to support your family’s living expenses, to help them retain their current lifestyle without worrying about how to make ends meet. This is especially true if you are the main family breadwinner. 

And what about the cost of funerals? These days, funerals are extremely expensive. In fact, in Canada, a funeral’s cost is known to range from $5,000 to more than $15,000. So, get non-taxable life insurance, and don’t force your family to foot this pricey bill. 

As well as this, your death benefit can also help to pay for outstanding debts. In this way, non-taxable life insurance means your family won’t have the bear an unexpected financial burden upon your death. 

What Are The Tax Reporting Rules For Payouts On Life Insurance? 

If your life insurance death benefit gets earnings from interest, the insurance company will send a T5 slip to your beneficiary. In this return, the interest earnings will be reported on line 121. 

Do I Need An Advisor? 

If you are concerned about the impact of tax on your life insurance’s death benefit payout or you have any other concerns about your life insurance policy, speak to an advisor from your policy’s provider. 

So, Is Life Insurance Taxable In Canada? 

So, in the vast majority of situations, life insurance is not taxable in Canada. However, if you use your life insurance policy as collateral on a loan, sell your life insurance policy, have a second cottage or fail to appoint a beneficiary, taxes will need to be paid on your death benefit. Thankfully, these are the only situations in which your life insurance could be taxable. So, armed with this information, you can go ahead and choose the right financial product for you.

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