Life Insurance · Components 3 and 4: Implement and provide service (35%)
Policy Taxation, Changes & Claims
How life policies are taxed while the insured is alive: adjusted cost basis, dispositions, policy gains on surrender, withdrawals, loans and dividends, exempt and non-exempt policies, and transfers of ownership. Also covers in-force service: beneficiary changes, assignments, replacements, settlement options and the death claim process.
Customer service during the coverage·3 min read·6 sections
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Must-know for the exam
✓Policy gain = proceeds of disposition − adjusted cost basis, taxed in full as income, not as a capital gain (ITA s. 148(1), current to 21 Sep 2026).
✓ACB adds premiums and subtracts net cost of pure insurance and earlier proceeds such as loans and cash dividends (ITA s. 148(9)).
✓Dispositions include surrender, policy loans, maturity and partial withdrawals; exclusions include collateral assignments, disability benefits and exempt-policy death benefits (s. 148(9)).
✓Partial withdrawal from a post-2016 policy: ACB × withdrawal ÷ (cash value less loans) is the cost of the part disposed of (s. 148(4)).
✓Loan repayments are deductible up to earlier loan gains (ITA s. 60(s)); other repayments add back to ACB.
✓Non-exempt policies are taxed each anniversary on accumulating fund over ACB (ITA s. 12.2(1)); exempt status is tested yearly (Reg. 306).
✓Transfers at ACB: to a spouse, and to a child who is the life insured. Other non-arm's length gifts use the greatest of value, consideration and ACB (s. 148(7)-(8.2)).
✓Absolute assignment revokes revocable designations; collateral assignment affects beneficiaries only to the debt (Insurance Act (BC) s. 69, current to 6 Oct 2026).
✓Insurer pays within 30 days of sufficient proof (s. 73). Actions: earlier of 2 years after proof or 6 years after death (s. 76).
✓Replacement restarts contestable and suicide periods; use the CISRO Life Insurance Replacement Declaration (as at 12 Oct 2026).
▸On this page · 6 sections
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Traps that cost marks
→Treating a policy gain as a capital gain.
→Assuming a policy's adjusted cost basis equals the premiums paid.
→Assuming a partial withdrawal is a tax-free return of cost until the ACB is used up.
→Believing policy loans are always tax-free.
→Forgetting that repaying a loan that created a policy gain earns a deduction.
→Treating policy dividends like share dividends that are always taxable.
→Assuming any transfer to a child rolls over at cost.
→Forgetting that an earlier policy loan reduced the adjusted cost basis.
Why it matters on the exam
Tax items are usually calculations: find the ACB, the proceeds and the gain. Service items test assignments, beneficiary changes, replacements and claims. Many distractors apply capital gains treatment to policy gains or assume loans are tax-free.
Dispositions and policy gains
Event
Disposition?
Proceeds
Full surrender
Yes
Cash value less loan repaid
Partial withdrawal
Yes
Amount withdrawn; ACB prorated (s. 148(4))
Policy loan
Yes
Lesser of loan and cash value less existing loans
Cash policy dividend
Yes
Dividend less part applied to premium or loan
Collateral assignment
No
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Disability benefit
No
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