There was a life insurance policy on a taxpayer’s parent.
Unfortunately, the parent passed away. The taxpayer and sibling were the beneficiaries.
It’s my understanding the death benefit from a life insurance policy is generally not taxable but there are exceptions.
For example, if there is interest earned the insurance company will send a T5 slip.
The insurance company calculates what is reportable as taxable income.
I checked and this taxpayer has no T5 on file with the CRA.
My best advice to you is to have your client contact their insurance company to obtain the plain English version of the tax exempt vs the taxable portion of this specific policy.
In general, term life insurance proceeds are non-taxable.
Whole life insurance, also known as permanent life insurance, has both and investment and life insurance component. Originally the savings component earned interest only. When the accumulated cash surrender value exceeded the face value of the policy, this excess amount was paid out in the form of a taxable interest check and reported on a T5 slip. Later, hybrid policies included the option of other investments which earned capital gains. These were know for a time as segregated funds. Now there are many types of hybrid insurance policies. These newer policies needed to meet a tax exemption test. As policies continued to evolve tax rules changed. On December 16, 2014 a new life insurance policy exempt test legislation received Royal Assent. This changed the rules. Older policies were grandfathered. Newer policies need to meet to new test.
The only way to know for sure about how the exempt test applies to your client’s policy is to contact their insurance company. If they send the legal terms and conditions version, ask for both the plain English version and the tax exempt guide that applies to this policy, You never know what surprise it may hold. For example, one of my clients inherited the remain of an investment and life insurance hybrid from his mother as a named beneficiary. They are both Status Indians living on reserve and London Life had created as special investment/pension/life insurance policy which paid out a specified amount over five years with a slip. The slip would have been taxable were it not for the Status Indian on Reserve and for the London Life letter and tax information guide which we provided to CRA tax review upon slips matching. A copy of the policy with the cover sheet indicating the named beneficiary is helpful and may be required. Please note that the named beneficiary can be a third party individual, corporation, or assigned to a charity upon death.
Overview of Canadian taxation of life insurance policies.
Tax season checklist - Life insurance
Is A Life Insurance Payout Taxable?
Is life insurance taxable in Canada?
For those who have lots of tax and estate planning clients with a life insurance component including “key person”, farm inheritance, and disabled dependent, I would recommend taking a Life Licence Qualification Program (LLQP) certification course from an approved educator. I have done it three times, twice in Ontario and one in Alberta. For tax accountants it is very fast and easy to learn. I prefer to take a 2 day live intensive and find a study buddy to memorize and go through all the exercises. In two weeks you can be done and well informed even if you don’t sit for the exam. I don’t currently hold a life insurance license and work with whichever life insurance company or agent my client chooses, however I prefer to take the course and understand the tax rules rather than depend upon a life insurance agent with zero tax training to explain the policy and tax implications to me. This became very evident when my client bought her second life insurance policy which was to be “key person” insurance corporate life insurance policy.
Her agent who had her as the policy holder and her husband as the name beneficiary instead having her corporation be the policy holder and her corporation be the named beneficiary with the insurance policy premiums paid by the corporation.