20 December 1989 Ministerial Letter 58918 F - Treatment of Proceeds from a Life Insurance Policy

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

This is in reply to your letter of October 5, 1989 wherein you requested our views on the treatment of proceeds from a life insurance policy when received by residents and non-residents of Canada.

24(1)

Resident of Canada

A resident of Canada is required to include in income for the calendar year in respect of the disposition of an interest in a life insurance policy the amount, if any, by which the proceeds of disposition received in the year exceed the adjusted cost basis of the policyholder.  In order to determine what portion of the proceeds will be subject to tax on maturity, you should contact the insurance company which should be in a position to provide you with the details required to determine the portion of the proceeds from the disposition of your life insurance policy which will be subject to taxation in Canada.

Non-Resident of Canada

A non-resident of Canada is taxable in Canada in the same manner as described above for a resident of Canada.

The main difference in treatment is that a resident of Canada is required to report his world income for a taxation year whereas a non-resident of Canada is only required to report certain types of income earned in Canada.

The treatment of the proceeds received by a non-resident from a life insurance policy on maturity is described above and will not be subject to the 25% Part XIII withholding tax as stated in your letter but will be subject to graduated tax rates from approximately 26% to 45%.  Since the rates of withholding tax are based on the amount to be included in income, the insurer would be in the best position to advise you of the rate to be withheld in your case.  It should be noted that the withholding rate is not a final tax but will be applied to the tax owing when the non-resident files his return in Canada.  Paragraphs 16 and 28 of Information Circular 72-17R3 (attached) outline the procedures to be followed when insurance policies are disposed of.

Canada Pension Plan Benefits

A Canadian resident who is in receipt of benefits under the Canada Pension Plan must include such receipts in his income for income tax purposes in the calendar year in which they are received.

Where benefits are received by a U.K. resident under the Canada Pension Plan they are exempt from tax in Canada but may be subject to tax in the United Kingdom.

Since we do not administer the payment of pensions under the Canada Pension Plan we suggest you write to the Department of Health and Welfare for any additional information at the following address:

Income Security Programs International Operations 9th Floor, Tower B Place Vanier 355 River Road Vanier, Ontario K1A 0L1

We trust the comments are adequate for your purposes.

Yours truly,

K.H.M.for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch