Life insurance is a contract between a policyholder and an insurance company, where the insurer agrees to pay a specified amount of money (the death benefit) to the policyholder’s beneficiaries upon the policyholder’s death. In addition to the death benefit, some life insurance policies also offer a savings component, known as cash value.
Participating whole life insurance policies are a type of policy that allows policyholders to share in the profits of the insurance company through dividends. These dividends are typically paid out annually and can be used to reduce premiums, purchase additional insurance coverage, or be paid out in cash to the policyholder.
The taxation of life insurance dividends in Canada depends on several factors, including the type of policy, the amount of premiums paid, and the policyholder’s income tax situation.
For participating whole life insurance policies, dividends may be taxable if they exceed the total premiums paid into the policy. The Canada Revenue Agency (CRA) considers the excess portion of the dividends to be income and subject to income tax.
For example, let’s say a policyholder paid $10,000 in premiums into a participating whole life insurance policy, and they receive $12,000 in dividends in a given year. In this case, the excess portion of the dividends, which is $2,000, is considered income and will be subject to income tax. The policyholder will receive a T5 slip from the insurance company, indicating the amount of dividends paid and the amount that is taxable.
It is important to note that if the dividends are within the amount of premiums paid, they are generally not taxable. In other words, if the policyholder receives dividends that are equal to or less than the total premiums paid into the policy, the dividends are not considered income and are not subject to income tax.
For non-participating policies or term life insurance policies, the dividends are typically not taxable because these policies do not generate profits that can be distributed as dividends.
It is also important to note that the taxation of life insurance dividends can be complex and may depend on various factors, such as the policy’s structure, the amount of premiums paid, and the policyholder’s overall income tax situation. Therefore, it is advisable to consult with a tax professional or a financial advisor for guidance on the specific tax implications of life insurance dividends in Canada.
In summary, life insurance dividends in Canada may be subject to taxation depending on the type of policy and the specific circumstances of the policyholder. For participating whole life insurance policies, dividends may be taxable if they exceed the total premiums paid into the policy. For non-participating policies or term life insurance policies, the dividends are typically not taxable.
Reach out directly for a detailed review and guidance on the tax implications of your life insurance dividends.