Life Policy Taxation, Changes & Claims question: taxable policy gain

LifePolicy Taxation, Changes & Claims

Callum's universal life policy was issued in 2019 and has no loans. Its cash surrender value is $80,000 and its adjusted cost basis is $30,000. He makes a partial withdrawal of $20,000 to help his son buy a car. How much of the withdrawal is a taxable policy gain?

A $0
B $10,000
C $12,500
D $20,000

Show the answer and explanation

Answer: C. $12,500

For a partial disposition, s. 148(4) prorates the cost basis: $30,000 × $20,000 ÷ $80,000 = $7,500 of ACB belongs to the part withdrawn, so the gain is $20,000 − $7,500 = $12,500. $0 assumes withdrawals come out of cost first, which the Act does not allow. $20,000 gives no share of the cost basis, and $10,000 halves the withdrawal as if it were a capital gain. Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), s. 148(1) and 148(4) (current to 21 Sep 2026; as at 12 Oct 2026).

Common mistake

Assuming a partial withdrawal is a tax-free return of cost until the ACB is used up.

Practice more Life Policy Taxation, Changes & Claims questions

Exam-style questions with worked answers, then full timed mocks. Free to start.

Start practicing →

Study note: Policy Taxation, Changes & Claims Lifepractice questions & mock exams

Related Life practice questions

Dafydd's whole life policy has a cash surrender value of $50,000, an adjusted cost basis of $18,000 and no existing loans. He takes a $25,000 policy loan to pay off a credit card. How much, if anything, must he include in income because of the loan?Orla's participating policy was issued in 2012. She has paid $30,000 of premiums in total. The insurer's records show a cumulative net cost of pure insurance of $12,500, and she has received $2,000 of dividends in cash, none of which was taxable. She has never taken a loan. What is her adjusted cost basis?Farid, 39, earns $70,000 a year and has group life equal to twice his salary, plus $60,000 of non-registered savings. If he dies, his wife Leila, who nets $30,000 a year, needs $48,000 a year after tax for the family. Other needs: final expenses $25,000, mortgage $310,000, other debts $18,000 and an education fund of $80,000. Capital earns 4% and only the income is spent. How much additional coverage does Farid need?

Build a daily practice habit — a few exam-style questions a day, with worked answers. Free to start.

Start practicing →

Original study material mapped to the public CISRO curriculum; not a real test question.Not affiliated with CISRO, CCIR or any provincial insurance regulator. Verify figures and rules against current guidance before relying on them.