When someone dies in Canada, different tax rules apply to money paid out as death benefits. Life insurance money given to named people after death is usually tax-free, though some provincial fees may still apply. Some death benefits are taxed while others aren’t – employer payments have a $10,000 tax-free limit, but anything above that counts as income. The person who gets the money must report taxable death benefits on their tax return. Tax amounts on survivor benefits change based on how much money you make and where you live in Canada. Life insurance payments to named people stay completely tax-free, making them valuable for passing on wealth. The $10,000 tax break exists specifically for employer death benefits. With good planning and naming the right people on policies, you can reduce taxes on these payments. The Canada Pension Plan (CPP) offers a one-time payment up to $2,500, which the estate or person who paid funeral costs can claim. Most survivor benefits count as taxable income, and some payments have automatic tax withholding – like the 25% taken from CPP death benefits before payment.
Death benefits from life insurance in Canada are generally not subject to income tax. The Canada Revenue Agency (CRA) classifies life insurance proceeds as non-taxable when paid to named beneficiaries following the policyholder’s death. However, these benefits may become part of the deceased’s estate and potentially subject to probate fees ranging from 0% to 1.7% depending on the province, with Ontario charging 1.5% on estates exceeding $50,000 and British Columbia charging 1.4% on estates over $25,000 as of 2025. According to Jamie Golombek, Managing Director of Tax and Estate Planning at CIBC, while life insurance proceeds are not subject to income tax in Canada, proper ownership structure and beneficiary designation are critical to avoid unnecessary probate fees and potential tax liabilities on registered assets.
Corporate ownership: Policies owned by corporations create distinct tax considerations under the Capital Dividend Account rules
Yes, there are taxes on some death benefits in Canada. Death benefits in Canada are subject to different tax treatments depending on their source and amount. Up to $10,000 of employer-paid death benefits for a deceased employee are exempt from tax, but any amount exceeding this threshold is considered ordinary income tax for the recipient. Life insurance payouts paid directly to a named beneficiary are completely tax-free in Canada, while the CPP death benefit is subject to a flat 25% withholding tax rate and must be reported as taxable income by the recipient. Canada does not have estate taxes, but certain assets like retirement accounts and real estate are deemed disposed of at time of death and may create capital gains tax obligations on the deceased’s federal return.
The beneficiary claims the death benefit on income tax. Beneficiaries who receive taxable death benefits must report these amounts on their personal tax return. The recipient of the benefit is responsible for declaring any taxable portion, such as employer death benefits exceeding $10,000 or the Canada Pension Plan death benefit. For employer death benefits, the $10,000 exemption is a lifetime maximum per deceased employee, not per beneficiary, meaning multiple beneficiaries must share this exempt portion. As stated by Tim Cestnick, co-founder and CEO of Our Family Office Inc. and tax columnist for The Globe and Mail, if the death benefit is paid to the estate rather than directly to individuals, the estate may need to report this additional income depending on how its distribution to beneficiaries occurs through the legal process.
On average, survivors can expect to pay between $2,500 to $8,000 annually in taxes on survivor benefits, depending on their total income level and province of residence. You pay taxes on survivor benefits based on the type and amount of benefit received. Survivor benefits from different sources are taxed at your marginal tax rate if they are considered taxable income. The CPP death benefit is subject to a flat 25% withholding tax rate and must be reported as taxable income, while up to $10,000 of employer-paid death benefits are tax-exempt with amounts exceeding this threshold taxed as regular income.
For the 2024 tax year, federal income tax rates range from 15% for income under $53,359 to 33% for income over $235,675, plus applicable provincial credit rates which vary by province. In accordance with Frank Di Pietro, Assistant Vice President of Tax & Estate Planning at Mackenzie Investments, CPP spouse pension payments are also taxable and recipients may choose to have income taxes deducted from monthly payments via direct deposit to avoid a large tax bill at the current year tax return filing.
No, a life insurance benefit is not taxable for a beneficiary in Canada. Life insurance death benefits paid directly to a named beneficiary are completely tax-free in Canada, regardless of the amount. The beneficiary of life insurance receives the insurance proceeds without any obligation to report them as income on their tax return. This tax-free status applies to both term life insurance and permanent life insurance policy types, making life insurance an effective wealth transfer tool that can bypass probate. As per Keith Masterman, Vice President of Tax, Retirement at CI Global Asset Management, this tax advantage is one of the primary benefits of life insurance in estate planning strategy, as it provides immediate, tax-free liquidity to beneficiaries while other assets like capital property may trigger a taxable event.
Yes, a tax exemption threshold exists for death benefits in Canada. The tax exemption threshold for employer-paid death benefits is $10,000, with any death benefit amounts above this limit considered taxable income for the recipient for tax purposes. This $10,000 exemption is a lifetime maximum per deceased person, not per beneficiary, meaning if multiple beneficiaries receive portions of a death benefit, they must collectively share this tax-free amount. For other types of death benefits, different rules apply – benefits from life insurance paid to named beneficiaries are completely tax-exempt regardless of amount, while the CPP death benefit is fully taxable. As reported by Brian Himmelman, President of Himmelman & Associates Financial Advisors, this $10,000 exemption threshold has remained unchanged since 1988 when it was established under subsection 248(1) of the Income Tax Act.
How to avoid taxes on death benefit?
You can avoid taxes on death benefits through proper planning and beneficiary designation. Tax liability on death benefits can be minimized or eliminated by understanding which benefits receive preferential tax treatment. Direct beneficiary designation on life insurance plans ensures the proceeds bypass probate and remain tax-free to recipients. For retirement plan assets like RRSPs or RRIFs, naming a spouse or dependent child as beneficiary allows tax-deferred rollover of these assets instead of having them fully taxed on the deceased’s final return. Setting up an irrevocable life insurance trust for contingent beneficiaries can help manage the tax burden over a period of time rather than having all income taxed in a single year. As noted by Ian Lebane, Tax and Estate Planner at TD Wealth, strategic beneficiary designations can save thousands in potential tax implications while ensuring assets transfer efficiently to your intended heirs without becoming part of estate income.
The recipient pays income tax on taxable death benefits. Income tax obligations fall on the person or entity that receives the death benefit, not on the deceased person’s estate. The beneficiary must report taxable death benefits, such as employer-paid benefits exceeding the $10,000 exemption or the CPP death benefit, on their personal tax return. The tax is calculated based on the recipient’s tax bracket, potentially resulting in different tax amounts for different beneficiaries receiving identical payments payable. For the 2024 tax year, marginal tax rates in Canada range from approximately 20% to 54% when combining federal and provincial rates, depending on the province and stream of income. In the view of Wilmot George, Vice President of Tax, Retirement and Estate Planning at CI Global Asset Management, beneficiaries should keep careful records of all insurance death benefit payout amounts received to ensure proper reporting and to claim any available solidarity tax credit payment.
The person who paid the funeral expenses claims the CPP death benefit. The CPP death benefit application must be submitted by the executor of the estate, the person who paid the pocket expenses for the funeral, or the common-law spouse or legally married partner. This one-time payment payable of up to $2,500 (as of 2024) is designed to help offset funeral costs and requires a death certificate when applying through the beneficiary form. The benefit amount is calculated based on the deceased’s CPP contribution amounts, with the maximum payment of $2,500 available if the deceased contributed for at least a 10-year period at the maximum annual rate. As mentioned by Doug Runchey, CPP specialist and founder of DR Pensions Consulting, approximately 148,000 CPP death benefit applications were processed in 2023, with an average payment of $2,284 disbursed to eligible claimants through direct deposit or other payment options.
The estate or person who paid funeral expenses is eligible for the $2,500 death benefit. The CPP death benefit of up to $2,500 is available when the deceased made sufficient contributions to the Canada Pension Plan during their working years. The applicant must complete a death claim form as the executor of the estate, the person who paid the funeral expenses, or the surviving spouse. To qualify, the deceased must have contributed to CPP for at least one-third of the calendar years in their combined contribution period, with a minimum of 3 years of contributions from payments made during their working life. As observed by Alexandra Macqueen, Certified Financial Planner and co-author of “Pensionize Your Nest Egg,” applications must be submitted within a 60-month period (5 years) of the date shown on the death certificate, and the benefit amount is calculated as 6 times the deceased’s monthly CPP retirement pension, up to the maximum of $2,500.
Yes, survivor benefits are taxable in Canada. Survivor benefits from various sources are generally considered business income that must be reported on the recipient’s tax return. The CPP survivor’s pension and payments to employees’ dependent children are fully taxable and recipients can request withholding at source to manage their tax liability. Public service pension plan survivor benefits are typically taxable at the recipient’s marginal tax rate, while only the portion attributable to investment income from annuity income to survivors may be taxable. In the words of Jason Heath, Managing Director at Objective Financial Partners Inc., approximately $5.7 billion in CPP survivor benefits were paid to 1.3 million Canadians, with an average annual benefit of $4,385 subject to income tax at the recipient’s marginal rate, though some may qualify for a tax credit depending on their financial situation.
Yes, there are withholding requirements for death benefits in Canada. Tax withholding applies to certain death benefits, with the CPP death benefit subject to a flat 25% withholding tax when paid to Canadian residents. For non-resident beneficiaries, the withholding rate may be 25% or a different rate as specified by tax treaties between Canada and the beneficiary’s country being on loan. Employer-paid death benefits exceeding the $10,000 exemption are subject to regular income tax withholding rates based on the payment amount, with rates ranging from 10% for amounts under $5,000 to 30% for amounts over $15,000. Based on David Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch P.C., life insurance companies and other payers of death benefits must report these payments on a T4A slip with complete details and appropriate withholding amounts shown in box 022 for the recipient’s tax filing purposes, and may require a clearance certificate for significant distributions.
For more information on Taxes on death benefits and other life insurance questions contact the experts at IBC Financial today.
The primary difference between annuities and life insurance is that annuities protect against outliving your money while life insurance protects against dying too soon. Annuities provide income during your lifetime, whereas life insurance provides a death benefit to your beneficiaries. Term life insurance and Universal Life Insurance focus on death benefit protection, while annuities focus on lifetime income. Insurance products like annuities and life insurance policies serve complementary purposes in a comprehensive financial plan. In 2023, Canadian life insurance new annualized premium increased 4% to $1.86 billion, while the annuity business revenue was $4.5 billion for group and $2.8 billion for individual policies, showing substantial markets for both products. As observed by Jason Pereira, award-winning Financial Planner and President of Woodgate Financial, understanding the distinct roles of insurance and annuities is crucial when designing a comprehensive financial plan that addresses both mortality and longevity risks. Canadian life insurance companies often offer both types of products, allowing customers to balance protection with cash value and income generation based on their retirement income needs.
For more information about life annuities and infinite banking contact the IBC Financial team today.
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