Key takeaway
In Canada, life insurance premiums you pay personally are generally not tax-deductible. Exceptions apply in business contexts: for example, premiums on key-person or corporate-owned life insurance where the corporation is beneficiary may be deductible in certain situations, and there are rules for policies used as collateral for business loans. For most individuals, premiums are paid with after-tax dollars.
Personal life insurance premiums
Premiums you pay on a policy you own personally, with your family or estate as beneficiary, are not deductible. You pay with after-tax income. The death benefit is generally tax-free to the beneficiary. So there’s no income tax deduction for the premium, but the benefit is not taxed when paid out.
Corporate-owned life insurance
When a corporation owns a policy on a key person and is the beneficiary, the premium is often not deductible to the corporation — CRA generally treats it as a capital or personal benefit. However, the death benefit (minus the policy’s adjusted cost basis) can be added to the capital dividend account (CDA) and paid out as tax-free capital dividends to shareholders, which is a major tax advantage.
Rules are complex; structure matters. Some arrangements (e.g. insurance as collateral for business loans) have different tax treatment. Always get advice from an accountant or tax advisor.
Key-person and business loan arrangements
Key-person insurance protects the business if a key person dies. Deductibility of premiums depends on ownership, beneficiary, and purpose. In many cases premiums are not deductible, but the death benefit can help the business continue or repay debt.
When life insurance is assigned as collateral for a business loan, the interest on the loan may be deductible; the insurance premium itself typically is not. Documentation and purpose must support the deduction; professional advice is recommended.
What to do
Don’t assume personal premiums are deductible — they usually aren’t. If you have a corporation or use life insurance in your business, have an accountant or tax advisor confirm whether any premium or interest is deductible and how the death benefit will be taxed.
Frequently asked questions
Can I deduct life insurance premiums on my tax return?
For personal policies, no — CRA does not allow a deduction. For corporate or business policies, deductibility depends on the structure; often premiums are not deductible, but the death benefit may get favourable treatment (e.g. CDA).
Are key-person life insurance premiums deductible?
Usually not. The corporation’s premium is typically not deductible. The benefit is the tax-free (or CDA) death benefit to the company, not an annual deduction.
Is corporate-owned life insurance tax-deductible?
The premiums paid by the corporation are generally not deductible. The main tax benefit is the ability to pay out the death benefit (minus ACB) as tax-free capital dividends from the CDA.
Where can I find the official CRA rules?
CRA’s guidance on life insurance is in the Income Tax Act and related interpretations. Your accountant or a tax lawyer can point you to the exact sections and how they apply to your situation.