Are Life Insurance Premiums Tax Deductible in Canada?

Life insurance premiums in Canada are generally not tax deductible for individuals. They are primarily considered personal expenses. While the general rule applies to most situations, specific circumstances and policy structures can lead to exceptions where premiums or related costs may offer tax advantages.

General Rule of Non-Deductibility

For most individuals, premiums paid for life insurance policies are not tax deductible. This principle applies to various common policy types, including term life insurance, whole life insurance, and universal life insurance. The Canada Revenue Agency (CRA) views these payments as personal expenses.

Non-deductibility is linked to the tax-exempt status of the death benefit. Death benefits are typically received tax-free by beneficiaries. Since the payout is tax-free, premiums paid to secure this benefit are generally not deductible, ensuring balanced tax treatment.

Specific Deductible Scenarios

While life insurance premiums are largely non-deductible, specific situations exist where they can offer tax advantages, particularly when the policy serves a business or income-producing purpose. One scenario involves using a life insurance policy as collateral for a business loan. Premiums may be deductible if the policy is assigned to a restricted financial institution, such as a bank or credit union, as a requirement for a loan. The loan itself must be used for income-producing purposes, and the interest on that loan must also be deductible. The deduction is limited to the portion of the premium that relates to the net cost of pure insurance and the amount of the loan outstanding.

Another scenario involves charitable donations. If a life insurance policy is irrevocably assigned to a registered Canadian charity, the premiums paid after the assignment may be eligible for a charitable donation tax credit. The individual paying premiums receives a tax receipt, which can then be used to reduce their personal income tax. Alternatively, donating a paid-up policy or designating a charity as beneficiary can also provide tax benefits to the donor’s estate, as the death benefit can qualify for a donation tax credit.

Corporate-Owned Policies

When a corporation owns a life insurance policy, the premiums paid are generally not tax deductible for the corporation. This applies even for policies intended for business purposes, such as key person insurance or funding buy-sell agreements. The CRA considers these premiums a non-deductible expense, similar to personal policies.

Despite the non-deductibility of premiums, corporate-owned life insurance offers distinct tax implications. Any cash value growth within the policy can accumulate on a tax-deferred or tax-exempt basis. Upon the death of the insured, the death benefit received by the corporation, less the policy’s adjusted cost basis, can typically be credited to the corporation’s Capital Dividend Account (CDA). This allows the corporation to distribute these proceeds to Canadian resident shareholders as a tax-free capital dividend, providing a tax-efficient way to transfer wealth.

Interest on Policy Loans

While life insurance premiums themselves are generally not deductible, interest paid on a loan secured by a life insurance policy may be deductible under specific conditions. This deductibility is separate from the premium payments. For the interest to be deductible, the loan proceeds must be used for an income-producing purpose.

For instance, if a policyholder borrows against the cash value of their permanent life insurance policy and uses those funds to invest in a business or income-generating property, the interest charged on that loan could be deductible. It is important to distinguish between the non-deductible nature of the premium and the potential deductibility of interest on a policy loan used for business or investment activities.