An individual is considering taking a $10,000 loan from the cash value of their universal life insurance policy. Their policy's Adjusted Cost Base (ACB) is $8,000, and the cash surrender value is $15,000. What are the tax implications of this policy loan in Canada?

Question: An individual is considering taking a $10,000 loan from the cash value of their universal life insurance policy. Their policy's Adjusted Cost Base (ACB) is $8,000, and the cash surrender value is $15,000. What are the tax implications of this policy loan in Canada?

Answer options:

• The $10,000 policy loan is immediately taxable as income because it exceeds the policy's ACB. ✅ The policy loan is generally not considered taxable income at the time it is received.
• Only the portion of the loan exceeding the cash surrender value is taxable.
• The interest paid on the loan is tax-deductible.

Correct answer: The policy loan is generally not considered taxable income at the time it is received.

Explanation: In Canada, policy loans from life insurance policies are generally not considered taxable income when received. Taxation may occur if the policy is surrendered for less than the outstanding loan, or if the policy is deemed a 'prescribed annuity contract' and the loan exceeds its maximum accumulation fund.