Life Policy Taxation, Changes & Claims question: policy loan to pay off a credit card

LifePolicy Taxation, Changes & Claims

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?

A $0
B $7,000
C $25,000
D $32,000

Show the answer and explanation

Answer: B. $7,000

A policy loan is a disposition under s. 148(9). Its proceeds are the lesser of the loan, $25,000, and the cash surrender value less existing loans, $50,000, so $25,000. The excess over the adjusted cost basis is income: $25,000 − $18,000 = $7,000. $0 assumes loans are never taxable, $25,000 ignores the cost basis, and $32,000 taxes the whole accrued gain in the policy rather than the amount borrowed. Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), s. 148(1) and 148(9) 'disposition' (b) and 'proceeds of the disposition' (b) (current to 21 Sep 2026; as at 12 Oct 2026); CISRO LLQP Curriculum (May 2015; current as at 12 Oct 2026), Life component 1.2 (policy loan taxation).

Common mistake

Believing policy loans are always tax-free.

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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.