Is the death benefit taxable in Canada?

The general rule

A life insurance death benefit paid to a beneficiary in Canada is generally not included in that beneficiary’s income. They receive it without paying income tax on it.

This is one of the clearer rules in the area and it covers the ordinary case: an individual owns a policy on their own life, names a person as beneficiary, and the benefit is paid on death.

It applies whether the beneficiary is a spouse, a child, a friend or a charity, and it does not depend on the size of the benefit.

What is not covered by that rule

Interest. Insurers sometimes pay interest on a death benefit, typically covering the period between the date of death and the date of payment. That interest is a different thing from the benefit itself, and it is taxable. The insurer reports it, usually on a T5.

Corporate ownership. Where a private corporation owns the policy and is the beneficiary, the corporation receives the proceeds without income tax, and getting the money out to shareholders is a separate step. The amount above the policy’s adjusted cost basis is generally credited to the capital dividend account, from which a tax-free capital dividend can be paid to shareholders.

That is a genuine planning advantage, and it depends on the corporation still existing, the account being properly tracked, and the dividend being correctly declared. It needs an accountant. See life insurance for business owners.

Policies transferred or sold for value. Where a policy has been sold or transferred to someone other than the original owner in exchange for consideration, the tax treatment can differ. This is uncommon in ordinary personal situations and it does happen, particularly with older business arrangements.

Money inside the policy while you are alive. This page is about the death benefit. Withdrawals, surrenders, policy loans and dividends during your lifetime follow entirely different rules, and some of them are taxable. See tax on cash value and policy loans.

Probate fees are a separate question

This causes real confusion, so it is worth separating clearly.

Income tax on the death benefit: generally none.

Probate fees, called by different names in different provinces, are charged on the value of an estate that goes through probate. They are not income tax and they are provincial rather than federal.

Whether they touch a life insurance benefit depends on where the money goes. A benefit paid to a named person normally bypasses the estate entirely, so it is generally not counted. A benefit paid to the estate goes into the pot and can be included in the calculation.

So the structural choice affects probate fees even though it does not affect income tax. That trade-off, along with creditor exposure and timing, is covered in naming your estate versus a person.

What the estate may still owe

The death benefit not being taxable does not mean the estate has no tax to pay.

Death triggers a deemed disposition of capital property, so accrued gains on a cottage, a rental property or a non-registered portfolio can produce a substantial bill in the final return. Registered plans not passing to a spouse are generally brought into income in the year of death.

Those liabilities exist whether or not there is life insurance. What the insurance often does is provide the cash to pay them, which is the whole basis of permanent insurance in estate planning.

Premiums are not deductible

The other side of the arrangement, and it follows logically.

Life insurance premiums are generally not deductible for personal income tax purposes in Canada. There are narrow exceptions, most commonly where a policy has been assigned as collateral for a business loan and certain conditions are met.

The broad structure is that you pay premiums with after-tax money and the benefit comes out without further tax.

Get advice on your own situation

The general rule covers most people, and the exceptions are where the money is.

Corporate ownership, trusts, policies with an unusual history, non-resident beneficiaries, and estates with substantial assets all raise questions this page cannot answer. Tax rules also change.

Take your own circumstances to an accountant or a tax professional before acting. This page is orientation, not advice, and it is not a substitute for either.