Life insurance: what to declare for taxes

Life insurance: what to declare for taxes


The income statement is an annual obligation to which both individuals and businesses must submit. This is how governments assess the country's income and financial worth. In theory, we have to pay tax on all of our income - that is, on all the money we earn in a year. But there are exceptions called non-taxable income. And insurance in all of this? How does it work? Will your heirs have to pay tax on the amount bequeathed? Here is the answer to these questions!

Non-taxable income

Quebec law stipulates that property received as an inheritance, as well as "amounts from life insurance received following the death of the insured" are not taxable. They should therefore not be considered in the overall annual income.

Whether you opt for term or permanent life insurance, the amount received as an inheritance will almost never be taxable. Your heirs will therefore not have to include it on their income tax return. Here comes the "almost never", since there is indeed an exception to the rule! Indeed, if during your lifetime you benefit from the fruits of your life insurance, for example by buying it back, you will then have to pay taxes on the two levels of government (federal and provincial), and this, up to the value of your investments.

What about the savings component?

You will obtain the savings component by subscribing to permanent life insurance, in universal or whole form. Regarding the second option, you will have guessed that you will be insured for the rest of your life!

However, these two insurances have one thing in common: the cash surrender value, which is contiguous to the savings component of the insurance. Be careful, however, if you decide to buy back your insurance, in part or in whole, you will have to declare it and pay tax on the amount, since it will be considered to be an addition to your income.

Another clarification, the surrender value of your insurance increases at the same rate as the capital. The amount remains tax-sheltered, again until it is touched.

The cash value of life insurance can be used for many purposes, such as securing a loan (bank or otherwise). A nuance applies when it comes to taxes: the interest payments are deductible if you invest the loan (for example in a business or a property). The loan as such is not taxable.

At the same time, the life insurance provided with your group plan is considered a taxable benefit, and therefore can be added to your annual return.

Other situations

Did you reduce the cash value of your policy by taking a cash advance? You will receive a T5 statement from your company to add it to your taxes, since it is an amount received.

Or could you be bequeathing your life insurance to a registered charity while continuing to pay the premiums? You will receive a tax credit from this organization.

As you study the subject, you realize that taxing life insurance is pretty straightforward. Indeed, if you have understood the principle that income = taxable and donation = non-taxable. You should get away with it easily. Otherwise, you can always contact the Infoprimes team for an expert help.