When it comes to life insurance premiums, questions abound.
It’s only natural to want to know the finer details about your coverage, including whether you can save on premiums. For instance, one of the most commonly asked questions is, “Can I claim life insurance premiums on my taxes?” The answer is typically no, though there are some exceptions.
Let’s take a look at these together.
The Income Tax Act Contains Restrictions (and Exceptions):
The Income Tax Act in Canada serves as a roadblock to tax-deductible life insurance premiums for most individuals. Simply put, you are normally unable to claim the premiums because life insurance in Canada is classified by the Act as a personal expense. However, as we’ll now explore, there are a few exceptions to this rule that you may be able to potentially take advantage of.
Collateral
As an individual, you won’t be able to get a deduction using your life insurance premium unless you put the policy towards a loan as collateral. The same applies to businesses.
Charity Tax Credits
Again, you can’t use your premiums as a tax deduction. However, you can receive a tax credit as an individual under the condition that a charity is the policy owner. It’s important to note that you can’t simply name the charity as a beneficiary to obtain this credit. In this case, your estate would receive the tax credit (referred to as a death benefit), which would then be presented to the charity in question.
Alternatively, what if you are attempting to secure a deduction as a business? In this instance, yes, you would be able to do so if the charity is the policy owner.
Can I Get a Deduction from Key Person Insurance Premiums?
This is not possible for either an individual nor a business. Individuals cannot purchase this kind of insurance, and businesses can’t get deductions if they already receive the death benefit.
What About Group Term Life Insurance?
There are two possible scenarios when it comes to deducting group term life insurance premiums from income tax. If you’re attempting to do so as an individual, then the company you work for would be the one responsible for paying the premiums in most cases. Under these circumstances, the individual employee cannot use the premiums for a deduction. The other scenario is when you are the employer, wherein these premiums may be used as a deduction since you are paying them rather than the employee, meaning the costs would be classified as a company expense.
Unsure How to Proceed? Reach Out to the Experts!
It might feel overwhelming to determine whether you’re able to use your life insurance premiums to secure a tax deduction. Perhaps you haven’t yet decided on the type of coverage you need and want to select an option that makes it possible to save during tax season. Regardless, it’s in your best interests to minimize guesswork and enable greater peace of mind.
Discuss your life insurance needs and tax-related concerns with an experienced brokerage team well-versed in Canadian laws and regulations; these professionals are instrumental in helping you make informed, effective, and stress-free decisions. Alternatively, if you run a business and are having trouble deciding on insurance coverage and other benefits for your team, a brokerage can provide plenty of insight, guidance, and direction on how best to proceed.
On that note, if you need a hand with deciphering the complex intricacies of the Income Tax Act or selecting a policy, our very own team at DBA is happy to assist. Reach out to us today or explore our available services.
