Are Life Insurance Payments to Beneficiaries Taxable in Ontario?

If you have been named as a beneficiary on someone's life insurance, one of your first questions is likely whether you will owe tax on the payment. For most people the answer is reassuring, but there are a few situations where tax does come into the picture.

This article explains the general rule in Ontario, where the exceptions arise, and how life insurance differs from RRSPs, RRIFs and TFSAs, which people often confuse with it.

The general rule

The CRA lists most amounts received from a life insurance policy following someone's death as amounts that are not reported or taxed. That means a death benefit paid to you as a named beneficiary is generally not added to your income.

Inheritances work similarly. The CRA lists most gifts and inheritances as amounts that are not reported or taxed for the person who receives them.

When tax can still arise

• Interest and other income. The CRA states that income earned on life insurance amounts is taxable. If the insurer holds the money and pays interest, or you invest it after receiving it, that income is reportable.
• Investment-type policies. The word 'most' in the CRA wording matters. Whether a particular policy with an investment or savings component produces taxable amounts depends on the contract and the facts, so confirm with an accountant.
• Payments to an estate. If the designation is to your 'heirs, next of kin or estate', the money goes through the estate and does not bypass it. Whether any tax question arises once the money is in the estate depends on the estate's own circumstances, so it is worth confirming with an accountant or lawyer.

Probate and creditors

Tax on income is separate from probate tax. When a beneficiary is designated, the insurance money does not form part of the insured's estate and is not subject to the claims of the insured's creditors. The exception is a designation in favour of the insured's 'heirs, next of kin or estate', which is treated as a designation of the personal representative, so the money goes through the estate. Estate Administration Tax is $0 on estates of $50,000 or less, and above that it is $15 for every $1,000 (or part of $1,000) of value over $50,000, for applications on or after January 1, 2020. Assets with a beneficiary designation are excluded when the estate value is calculated.

Creditor protection can also apply while the insured is alive. While a designation in favour of the insured's spouse, child, grandchild or parent is in effect, the insured's rights in the insurance money and the contract are exempt from execution or seizure. For this purpose, a spouse includes a person who is not married but lives with the insured in a conjugal relationship.

Be aware of one exception. For a dependant's support claim under the Succession Law Reform Act, life insurance owned by the deceased is deemed part of the net estate, so a designated payout can still be reached by a dependant.

Registered plans are different

People often lump RRSPs, RRIFs and TFSAs together with insurance, but the tax treatment is not the same.

If you are a beneficiary of a registered plan, the tax may fall on the deceased's final return or on you, depending on who you are and how the plan is paid out.

A surviving spouse or common-law partner who was not named as RRIF successor annuitant can still become one if the deceased's legal representative consents and the RRIF carrier agrees.

What to do next

• Confirm in writing who the designated beneficiary is and whether the estate is named.
• Ask the insurer how the money will be paid and whether interest will be added.
• Keep records of any interest or investment income you earn on the proceeds.
• Separate life insurance from registered plans when you speak to the accountant.
• If an executor is involved, ask whether a CRA clearance certificate is being obtained before estate property is distributed.

Once the insurer receives sufficient evidence of the claim, it must pay the insurance money to the person entitled within thirty days. If the insurer admits liability but a person entitled cannot be found, there are competing claims, or no one can give a valid discharge, the insurer may apply to court after thirty days to pay the money into court.

If the policy has an investment feature, or the money is going through an estate, an accountant or lawyer can confirm the tax result for your situation.

Frequently asked questions