Mark, a Canadian resident, owns a whole life insurance policy with a cash surrender value (CSV) of $150,000 and a death benefit of $500,000. He decides to surrender the policy. At the time of surrender, his adjusted cost basis (ACB) in the policy is $120,000. How will this transaction be treated for Canadian tax purposes?

Question: Mark, a Canadian resident, owns a whole life insurance policy with a cash surrender value (CSV) of $150,000 and a death benefit of $500,000. He decides to surrender the policy. At the time of surrender, his adjusted cost basis (ACB) in the policy is $120,000. How will this transaction be treated for Canadian tax purposes?

Answer options:

• The $150,000 CSV will be tax-free. ✅ The $30,000 gain ($150,000 - $120,000) will be fully taxable as ordinary income.
• The $30,000 gain will be taxed as a capital gain, with a 50% inclusion rate.
• There will be no tax implications until the death benefit is paid out.

Correct answer: The $30,000 gain ($150,000 - $120,000) will be fully taxable as ordinary income.

Explanation: Upon surrender of a life insurance policy, any amount by which the Cash Surrender Value (CSV) exceeds the Adjusted Cost Basis (ACB) of the policy is considered a policy gain. This gain is fully taxable as ordinary income in the year of surrender, not as a capital gain.