If a life insurance policy loses its 'exempt' status under the Income Tax Act, what is the consequence?

Question: If a life insurance policy loses its 'exempt' status under the Income Tax Act, what is the consequence?

Answer options:

• The policy proceeds become 100% taxable upon death. ✅ Annual growth within the policy's cash value becomes taxable to the owner.
• The insurance company must refund the excess premiums.
• The death benefit is capped at the level of the cash value.

Correct answer: Annual growth within the policy's cash value becomes taxable to the owner.

Explanation: The 148.1(1) test (Anti-dumping) in the Income Tax Act ensures that the 'exempt' status of a life insurance policy is maintained. If a policy fails the MTAR (Maximum Tax Act Reserve) test due to too much cash value, it becomes non-exempt.