Are Life Insurance Death Benefits Taxable to Ontario Beneficiaries?

If you are named on someone's life insurance policy, you are probably wondering two things: when the money will arrive, and whether you will owe tax on it. The answers depend on how the policy was set up and what else is going on with the estate.

This article explains the Ontario rules on who gets paid and the points where tax can come up. It cannot give a final answer on your situation, so use it to prepare for a conversation with the insurer and an accountant.

Is the payout taxable?

The CRA lists most gifts and inheritances among the amounts that are not reported or taxed. That is a general starting point. Whether your payout fits it, and how any extra amounts the insurer pays are treated, should be confirmed with an accountant or by asking the insurer for a breakdown.

It helps to separate the payout itself from income that may be earned afterward. If the money passes through an estate that earns income and allocates it to you, that income is reported on a T3 slip and in most cases is included in your income.

Who gets paid: beneficiary or estate

An insured may designate themselves, their personal representative or a beneficiary to receive insurance money, by the contract or by a declaration. A designation of 'heirs' or 'estate' is deemed to designate the insured's personal representative.

If a named beneficiary is paid directly, you deal with the insurer. If the estate is named, the money goes to the personal representative, who then handles it as part of the estate. Estate trustees pay taxes, bills and other debts and then distribute the estate according to the will.

An irrevocable designation must be made in the contract, or by a declaration filed with the insurer during the insured's lifetime. It cannot be changed without the beneficiary's consent. A purported irrevocable designation in a will takes effect only as a revocable one.

When payment is delayed or disputed

An insurer that admits liability may apply to court to pay the insurance money into court in specified cases. These include adverse claimants, an entitled person whose whereabouts are unknown, or no one who can give a valid discharge. The application can be made after more than 30 days from when the money became payable.

Questions about who should be paid can also arise from the wrongdoing of a beneficiary. Ontario courts apply the public policy rule that a criminal should not profit from their crime, and a person who kills their spouse cannot obtain the spouse's life insurance proceeds. The rule has exceptions. A person found not criminally responsible because of mental disorder is not barred, and an innocent beneficiary may receive proceeds when the insured dies accidentally while committing a crime. These cases turn on their facts and need legal advice.

What you may need to report

• Tax slips: keep any slip the insurer or an estate sends you and give it to your accountant.
• Estate income: amounts an estate allocates to you are generally reported on a T3 slip.
• ODSP: if you receive ODSP, you must report money you or your family receive.
• ODSP limit: the $10,000 limit over 12 months includes life insurance payments.
• The deceased's final return: capital gains at death are reported there, not by you as beneficiary.

An estate uses the T3 slip to report income it allocates to beneficiaries, and in most cases those amounts are included in the beneficiary's income. For ODSP, you must report any money you or your family receive, including an inheritance, and you and each family member can receive up to $10,000 in total in a 12-month period from gifts, inheritances, trust and life insurance payments and lottery winnings without affecting income support, with amounts above that counting as income in the month received unless they are used for an approved disability-related item or service. There is an exception for inherited trusts: an inherited trust set up in a will is not considered income, up to $100,000 of a trust funded by an inheritance or life insurance may be exempt as an asset, and inherited money placed in a trust within six months may also qualify for the exemption. A deceased person is considered to have sold all their property just before death, and any capital gain or loss is reported on the deceased's final return, not by the beneficiary.

If you are also the estate trustee, a clearance certificate matters. A legal representative who distributes assets before getting a CRA clearance certificate (Form TX19) is personally liable for unpaid amounts, up to the value of the assets distributed.

What to do next

• Contact the insurer and ask who is named, and whether the designation was by contract or declaration.
• Ask the insurer to explain in writing what will be paid and whether it includes anything beyond the face amount.
• Give your accountant any slips and the insurer's breakdown before you file your return.
• If someone else disputes the designation, or the insurer has not paid, speak to a wills and estates lawyer.

Frequently asked questions