Are Life Insurance Proceeds Taxable to the Beneficiary in Canada?

When someone dies, several payments can arrive at once: an insurance payout, a government benefit, an employer payment and sometimes a registered plan. Families often assume all of them are tax-free, or all taxable. They are not treated the same way.

This article sorts out the common ones, shows where tax does apply, and explains why the details of a life insurance policy, including any interest, are worth confirming with an accountant or lawyer.

This article covers Canadian federal tax law, which applies in every province.

Start by identifying the type of payment

The word insurance is used loosely. A policy you or the deceased bought privately, a group plan through work, a government benefit and a registered savings plan each follow different rules. The first step is to find out exactly what is being paid, by whom and to whom.

How a life insurance policy payout is taxed depends on the policy, who is named and the facts of the situation. Because that depends on the details, confirm the treatment of a particular policy with an accountant or lawyer before you rely on it.

Death benefits that are not life insurance proceeds

CPP/QPP death benefits and group term insurance such as the federal supplementary death benefit are not reported on the final return. Up to $10,000 of employer death benefits received is exempt, and the excess is taxable to the recipient. The CRA is clear that these are not life insurance policy proceeds.

So a payment from an employer after death may be partly taxable, because only up to $10,000 of employer death benefits received is exempt. If you receive an employer payment, keep the paperwork showing what it was for and how it was calculated.

Registered plans are a different story

An RRSP or TFSA may be described as a death benefit, but the tax rules differ sharply.

If there is no named beneficiary on a TFSA, it goes to the estate. Details for registered plans are covered in separate articles on RRSPs, RRIFs and TFSAs.

For an RRSP, a refund of premiums paid to a qualifying survivor, meaning a spouse or common-law partner or a financially dependent child or grandchild, reduces the deceased's income and is taxed to the survivor unless it is transferred. The survivor can defer tax by transferring the refund to an RRSP, RRIF, PRPP, SPP or eligible annuity in the year received or within 60 days after the end of that year. Transfer to an RRSP requires the survivor to be 71 or younger at the end of the year of transfer. For a matured RRSP, a surviving spouse or common-law partner who is successor annuitant reports the payments as income when received, and the annuitant is not deemed to have received them at death. A TFSA successor holder's own contribution room is not affected, and they do not gain the deceased's unused room. Quebec does not recognize successor holder designations; a survivor there can make an exempt contribution to their own TFSA by December 31 of the year after the year of death and file Form RC240 within 30 days of the contribution.

Interest and growth after death

Money can earn something between the date of death and the date it is paid out. Who reports that, and how, depends on who receives the money and what kind of asset it is.

Income the estate earns after death is reported on the estate's T3 Trust Income Tax and Information Return, not on the final return. For a TFSA, earnings after death on an annuity-contract TFSA are taxable to the beneficiaries when received. Post-death investment earnings that were in a TFSA may need reporting on the T3. For a matured RRSP, growth after death paid to beneficiaries or the estate is included in their own income.

For interest on an insurance payout in particular, ask the insurer how it will be reported and confirm the tax treatment with an accountant.

What to do next

• List every payment expected after the death and who is paying it.
• Ask the insurer, employer or plan administrator for the tax slips or statements they will issue.
• Separate government benefits, employer benefits, insurance policies and registered plans.
• Check whether an employer death benefit exceeds the $10,000 exemption.
• Keep records of any interest or growth paid after the date of death.
• Ask an accountant or lawyer about any policy where the owner, the insured and the beneficiary are different people, or where the estate is the beneficiary.

Frequently asked questions