Is Life Insurance Taxable in Canada?

Generally, no. When the person insured dies, the death benefit from a Canadian life insurance policy is not taxable income, and that holds whether the money goes to a named beneficiary or to the estate. Where tax does arise on the policy itself, it falls on the owner of a permanent policy while the person insured is alive, at the moment money comes out: a surrender, a withdrawal, dividends taken in cash beyond the adjusted cost basis, or a policy loan larger than that basis. Premiums on a personal policy are not deductible.

Those are the headlines, and the details decide real outcomes. Below, each event is taken in turn: who reports it, how Quebec residents file, and what to ask the insurer and an accountant before acting. The federal rules apply in every province; where Quebec adds its own layer, it is named.

How is a life insurance death benefit taxed in Canada?

When the person insured dies, the insurer pays the death benefit to the beneficiary named in the contract, or to the estate if no named beneficiary can receive it. Neither one receives it as income. Under the Income Tax Act, a payment made because of a death under an exempt policy is not a disposition of the policy, so no policy gain arises for the beneficiary, the estate or the owner. The CRA's archived bulletin IT-87R2 sets out the same rule at paragraph 16, for exempt policies and for policies last acquired before 2 December 1982.

The exempt test is set by Regulation 306, Income Tax Regulations. It limits how much value a policy may build up compared with its death benefit, and the insurer can confirm in writing whether your policy is an exempt policy. If a policy ever failed the test, the cost would fall on the owner, who would be taxed each year on the policy's growth. It would not fall on the beneficiary. The mechanics are on the exempt test and what happens when a contract fails it.

Interest is a separate matter. If the insurer adds interest to the benefit because the claim took time to settle, or if the beneficiary leaves the money with the insurer and it earns interest, that interest is taxable income to the person who receives it. The insurer reports it on a tax slip.

What the tax rule does not settle is where the money goes and how quickly it arrives. That depends on who is named, which is the next question.

What changes when the estate receives the benefit?

Naming the estate, or leaving no beneficiary who can receive, does not create income tax. It changes the route. The money becomes part of the estate (the succession, in Quebec). It is paid out under the will or the intestacy rules, after the estate is settled, and the estate's creditors can reach it. A benefit paid to a named beneficiary generally passes outside the estate; paid into the estate, it does not.

Probate costs follow the province. Some provinces charge a fee or a tax on the value of an estate that goes through probate, and insurance paid to the estate is part of that value. In Quebec, a notarial will does not need to be probated, while a holograph will or a will made before witnesses does (Gouvernement du Québec, probating the will, updated 16 April 2026).

The estate can end up as the recipient by accident:

• The only named beneficiary died before the person insured, and no contingent was named.
• A designation was never updated after a separation, a divorce or a death.
• The beneficiary line was left blank when the policy was issued.
• The form said "my estate" out of habit, when a person was intended.

Naming the estate can also be a deliberate choice, for example when the estate will need cash for the final tax return or for debts. Make that choice with a lawyer or a notary. The backup line on the form is explained on contingent beneficiary.

Which events are taxed, and who reports them?

One table covers the ground. "Owner" means the person or corporation that owns the policy, who may not be the person insured.

Each row is explained below. The adjusted cost basis (ACB) is the policy's cost for tax purposes, set out with policy loans further down and in the glossary.

Are life insurance premiums tax-deductible in Canada?

For a policy you own personally, no. Premiums are paid from income that has already been taxed, and there is no deduction on a personal return, whether the policy is term or permanent.

The Income Tax Act has a narrow exception for a policy assigned as collateral, and each condition matters. Part of a premium can be deductible when a lender that is a restricted financial institution (a bank, a trust company, a credit union or an insurance company, for example) requires the policy to be assigned as collateral for a loan, and the interest on that loan is deductible because the money is used to earn business or property income. The deduction is limited to the lesser of the premium and the policy's net cost of pure insurance for the year. It is further limited to the part that can reasonably be related to the amount owing on the loan.

Three arrangements do not qualify. A loan from a relative or a private lender is not from a restricted financial institution. A policy loan from your own policy is not a collateral assignment. And offering a policy that the lender did not require does not meet the test. The collateral route is explained on which part of the premium is deductible.

Premiums paid by a corporation are generally not deductible either. Corporate ownership changes other things, covered in the corporate section below; it does not turn a premium into a business expense.

Is the growth inside a permanent policy taxed each year?

Not while the policy stays exempt. Term insurance has no cash value, so the question does not arise for it: its only event of consequence is the death benefit. A permanent policy builds cash value, and that growth is not taxed year by year while the policy meets the exempt test.

Deferred is not the same as tax-free. The growth is measured again whenever money leaves the policy during the owner's lifetime: a surrender, a withdrawal, cash dividends above the basis, or a policy loan above the basis. Only a payment on death under an exempt policy takes the gain out of tax altogether. The difference is set out on tax deferred growth.

Another insurance contract shows the contrast. A non-registered deferred annuity does not get this treatment: its accrued income is taxed every year under the accrual rules of the Income Tax Act, even when nothing is paid out. The same accrual rules would reach a life insurance policy that lost its exempt status.

Who lends on a policy loan, and who receives the interest?

The insurer. A policy loan is an advance of the insurer's money to the owner, with the policy's cash surrender value as security. The owner pays the interest to the insurer, at a rate the insurer sets and may change under the contract's terms. Nothing is withdrawn from the policy when the loan is made. The cash value stays in the contract as security, and the loan is a debt against it.

The loan has effects for as long as it is outstanding:

• Unpaid interest can be added to the loan balance, depending on the contract, so the debt can grow.
• The loan and accrued interest are deducted from the death benefit if the person insured dies before it is repaid.
• They are also deducted from the cash surrender value, so the net amount available is lower.
• If the loan and interest reach the cash surrender value, the policy can lapse, which is a taxable event described below.
• Whether a loan affects the dividends on a participating policy depends on the insurer's practice, so ask for it in writing.

Assuris, the not-for-profit protection plan for policyholders, also works on net figures. For whole life, it protects up to $1,000,000 or 90% of your death benefit, whichever is higher, and up to $100,000 or 90% of your cash value, whichever is higher, calculated on the net death benefit and net cash value after any policy loans (Assuris, whole life, read on 27 September 2026). Every insurer authorized to sell life insurance in Canada must be a member.

How a loan is requested, priced and repaid is covered on policy loans.

When is a policy loan taxable?

A policy loan counts as a disposition of part of the policy under the Income Tax Act (ITA s.148(9)). The part of the loan up to the policy's adjusted cost basis is not income, but it reduces the basis. The part above the basis is included in the owner's income for the year the loan is received.

The basis is not simply the premiums paid. Broadly, premiums increase it; the net cost of pure insurance, which the insurer calculates each year, reduces it; and loans, withdrawals and cash dividends reduce it. On some permanent policies the basis rises in the early years and falls later, but the path depends on the contract. Ask the insurer for today's figure and a projection.

Illustrative example. The figures are assumptions for arithmetic only, not values from any insurer. A policy has a cash surrender value of $60,000 and an adjusted cost basis of $20,000. The owner takes a policy loan of $15,000. It is below the basis, so no income arises, and the basis falls to $5,000 ($20,000 minus $15,000). Later, ignoring premiums, insurance costs and interest to keep the arithmetic plain, the owner takes a further $12,000. Of that, $7,000 ($12,000 minus $5,000) is income for that year, and the basis falls to nil. If the owner later repays $12,000, a deduction of up to $7,000 is available: the amount previously included in income.

That last step is the repayment rule. When a policy loan is repaid, the Income Tax Act allows a deduction for the repayment, capped at the amount of that loan previously included in income and not already deducted. The repayment also rebuilds the adjusted cost basis, within a ceiling.

Two companion pages go further: when a policy loan becomes taxable and a policy loan higher than the ACB.

Is the interest on a policy loan deductible?

Only when the borrowed money is used to earn income from a business or from property, such as a rental building or a business. Interest on a policy loan spent on personal needs, a car, a trip or a home you live in, is not deductible.

Where the use qualifies, the insurer confirms the interest paid in the year on CRA Form T2210, Verification of Policy Loan Interest by the Insurer. Quebec residents claim the provincial deduction with Revenu Québec's form TP-163.1-V, Interest Paid on a Loan Taken Out on a Life Insurance Policy.

What counts is the use of the money, not its source. If part of an advance buys a rental property and part pays for a holiday, only the interest on the rental part can qualify. Keep a record of where each advance went, and let an accountant make the claim.

How does a loan from a lender, secured by the policy, differ?

An outside lender, such as a bank or a credit union, can lend against a policy in place of the insurer. The owner assigns the policy to the lender as collateral. The lender sets the rate, the repayment terms and the conditions, and the interest is paid to the lender, not to the insurer.

For tax, assigning a policy only as security for a debt is not a disposition, so no policy gain arises when the loan is made. The tax question comes back if the lender is ever repaid from the policy, for example by a surrender or a withdrawal: that step is a disposition taxed under the usual rules. On the death of the person insured, the lender is paid from the death benefit first and the beneficiary receives the rest.

The four ways to get money from a policy look alike and are taxed differently:

Are withdrawals and surrenders taxable?

A withdrawal, sometimes called a partial surrender, is a disposition of part of the policy, and the basis is not used up in full against it. Only a share of the basis is allocated to the part withdrawn, in proportion to the value taken out; the rest of the withdrawal is a gain. For older policies the share is measured against the policy's accumulating fund, as the CRA's archived bulletin IT-87R2 describes at paragraph 20. For policies issued after 2016, the Income Tax Act measures it against the cash surrender value instead.

Illustrative example. Assume a policy issued after 2016 with an adjusted cost basis of $30,000 and a cash surrender value of $100,000, and a withdrawal of $10,000 (assumed figures, not insurer values). The basis allocated to the withdrawal is $30,000 times $10,000 divided by $100,000, which is $3,000. The gain included in income is $10,000 minus $3,000, which is $7,000, and the basis left in the policy is $27,000. Unlike a loan, a withdrawal cannot be repaid; the value leaves the policy for good.

A full surrender ends the coverage. The gain is the surrender proceeds minus the basis, and the proceeds include any policy loan the insurer settles out of the cash value, not only the cheque the owner receives. That is why a surrender with a large loan outstanding can produce a taxable gain even when little or no cash is paid out.

A lapse works the same way. If a policy lapses while a loan is outstanding, the insurer applies the cash value to the loan, and that is a disposition. Any amount by which the loan settled exceeds the basis is income for that year, and the tax can fall due in a year with no cash to pay it.

A surrender puts the whole gain into one year, at the owner's combined federal and provincial marginal rate for that year. The effect of that timing is set out on cash surrender value.

Are participating policy dividends taxable?

A dividend on a participating policy is not a dividend on a share. It is an amount the insurer declares on its participating policies, based on the experience of its participating account, and it is taxed under the life insurance rules, according to the option the owner has chosen.

Dividends are not guaranteed. The insurer's board declares them each year, and past declarations do not predict future ones.

How each option is treated:

The rule behind the last three: when a dividend is applied automatically under the policy's terms to pay a premium or to repay a policy loan, the amount applied is not part of the proceeds of a disposition (IT-87R2, paragraph 19). Paid-up additions are bought with a premium inside the contract, so their value stays within the policy's exempt treatment. Confirm the option on your file and ask how the insurer reports it. The options are described on dividend-paying life insurance.

What happens for tax when you transfer ownership of a policy?

Changing the owner is a disposition by the old owner. The tax result depends on who receives the policy and on what is paid for it.

A gift, or a transfer to someone you do not deal with at arm's length (a relative or your own corporation, for example), is priced by the Income Tax Act, not by the parties. The old owner is treated as receiving the greatest of the policy's value (its cash surrender value), the fair market value of anything received for it, and its adjusted cost basis. Any amount above the basis is income to the old owner.

A sale at arm's length to an unrelated buyer is taxed on the price actually received, less the basis.

Two rollovers can defer the gain. A transfer to your spouse or common-law partner, during your life or on your death, generally takes place at the basis, so no gain arises, unless the owner elects not to use the rollover. A transfer for no consideration to your child, where the person insured is that child or that child's own child, also takes place at the basis.

A corporation that transfers a policy to a shareholder raises two questions: the corporation's own policy gain, and a benefit or dividend to the shareholder. Have an accountant compute both from the insurer's statement before any form is signed. The corporate case is set out on when the corporation pays and the shareholder owns.

How is a policy owned by a corporation taxed?

The premiums are generally not deductible. When the person insured dies, the corporation receives the death benefit without income tax.

The capital dividend account is where the difference shows. A private corporation adds to that account the part of the death benefit that exceeds the policy's adjusted cost basis (ITA s.89(1)). The corporation can then pay a capital dividend to its shareholders free of tax, but only by electing under subsection 83(2) of the Income Tax Act on CRA Form T2054, which has its own timing rules. It is the excess over the basis that is credited, not the whole benefit.

Paying premiums with corporate dollars can change the funding comparison, because corporate income may be taxed at a different rate than personal income. Whether that helps depends on the corporation's rate, on how money is later taken out, and on the shareholders' own situation, so an accountant should model it. More is on business owners and corporate-owned life insurance.

A policy loan on a corporate policy, or a corporate policy that names a shareholder's family as beneficiary, raises shareholder benefit questions. Settle the owner, the beneficiary and who pays with the accountant before the application is signed.

Does Quebec tax life insurance differently?

The federal Income Tax Act rules on life insurance apply to every Canadian resident, in every province. Quebec residents also file a separate provincial return with Revenu Québec under the Quebec Taxation Act (CQLR c. I-3), which contains its own provisions on life insurance policies, starting with its own definition of one. Residents of the other provinces pay their provincial income tax through the federal return.

For a Quebec resident, a taxable policy gain is therefore a question for two returns. Ask the insurer which federal and Quebec slips it will issue for the transaction, and have your accountant confirm the Quebec treatment before you act. Interest on a policy loan used to earn income is claimed in Quebec with form TP-163.1-V, described above.

The civil law around the policy differs too. Under the Civil Code of Québec, a married or civil union spouse named as beneficiary in a writing other than a will is irrevocable unless the writing says otherwise, so changing that designation needs the spouse's consent, and some insurers ask for that consent before a policy loan or a surrender. A divorce, or the dissolution of a civil union, ends the designation of the former spouse.

A notarial will needs no probate in Quebec, and a liquidator, not an executor, settles the estate. Material written for Ontario describes the wrong framework for these questions. The Quebec rules are set out on the Civil Code and the life insurance contract.

Are critical illness and other living benefits taxable?

A lump-sum critical illness benefit paid to an individual who owns the policy is generally received without income tax. Confirm it for your own policy with an accountant, above all in the two cases that follow.

A return of premium feature is treated separately from the benefit, and its tax result can depend on who paid the premiums and in what capacity. Where an employer or a corporation pays for or owns the coverage, the analysis changes again, because a benefit to an employee or a shareholder can arise.

Some insurers offer an advance of part of the death benefit when the person insured is terminally ill. How that works is covered on an advance of the death benefit while living.

How does life insurance fit with the taxes due at death?

A death benefit does not reduce the tax due at death. The Income Tax Act treats a person who dies as having disposed of his or her capital property at fair market value immediately before death, so an accrued gain on a cottage, a rental property or private company shares is taxed on the final return, even though nothing was sold. Registered retirement savings are also included in income at death, unless they pass to a spouse or another qualifying beneficiary.

What insurance brings is cash when that tax falls due, so a family can keep an asset instead of selling it to pay the bill. Property left to a spouse generally passes at cost, which defers the gain to the second death; it does not cancel it. The detail is on the deemed disposition at death and where the death benefit sits.

Where does The Infinite Banking Concept® fit in these tax rules?

The Infinite Banking Concept®, a term originated by Nelson Nash and a registered trademark of Infinite Banking Concepts, LLC, uses the features described above; it creates none of them. It changes nothing about how a policy is taxed, and it creates no exemption that does not already exist.

The approach funds a specially designed, high-cash-value, participating whole life insurance policy, lets the cash value grow under the exempt test, and uses policy loans from the insurer for major purchases, with the interest paid to the insurer and the loans repaid over time. Every rule above applies: a loan above the basis is taxable, the interest is a real cost, and a lapse with a loan outstanding can create a gain.

Participating whole life is insurance, not an investment. The approach needs steady surplus cash flow and a horizon of decades. It does not suit a household carrying high-interest debt, one without an emergency fund held outside the policy, or one likely to need the money in the first years, when cash values are low compared with the premiums paid. The case against it is set out fairly in objections and risks.

Owner, person insured and beneficiary: why the roles matter for tax

The owner controls the policy: names the beneficiary, and requests loans, withdrawals and surrenders. The owner reports every lifetime tax event described above. The person insured is the one whose death triggers the benefit. The beneficiary receives it.

These can be three different people or entities, and that alone does not create a taxable benefit. The question arises when someone other than the owner pays the premiums, such as an employer or a corporation paying for a policy owned by an employee or a shareholder, or when ownership is later transferred. Settle all three roles, and who pays, before the application is signed.

What to ask the insurer and an accountant before you act

Ask the insurer, in writing:

• The adjusted cost basis today, and its projection for the coming years.
• The cash surrender value, the loan balance and the accrued interest.
• The current policy loan rate, and how and when the insurer can change it.
• Which tax slips it will issue, federal and Quebec, for the transaction you are considering.
• Whether a policy loan affects the dividends it declares on your policy.

Ask an accountant:

• Which route (a policy loan, a collateral loan, a withdrawal or a surrender) produces the lowest tax this year, and why.
• Whether the interest on a loan you plan will be deductible, and what records to keep.
• What the tax at death would be on everything else you own, since that may be the bill a death benefit is meant to meet.
• If a corporation owns the policy, what the capital dividend account position is.
• Whether anything about your situation makes the general rules above a poor fit.

The answers depend on your marginal rate, your province, whether a corporation is involved and the other income you have that year. Those are facts about you, and they belong with an accountant who sees your figures.