A high-net-worth individual in Alberta holds a universal life (UL) policy with an accumulated cash value of $750,000. They decide to borrow $150,000 against the policy's cash surrender value. Which of the following statements accurately describes the tax implications of this policy loan under current Canadian tax law?

Question: A high-net-worth individual in Alberta holds a universal life (UL) policy with an accumulated cash value of $750,000. They decide to borrow $150,000 against the policy's cash surrender value. Which of the following statements accurately describes the tax implications of this policy loan under current Canadian tax law?

Answer options: ✅ The loan itself is not considered taxable income, but any interest paid on the loan is generally not tax-deductible for personal use.

• The entire $150,000 loan is immediately taxable as a policy gain, as it represents a distribution from the policy's cash value.
• The loan is taxable only if the policyholder defaults on repayment, at which point the outstanding balance becomes a taxable benefit.
• The loan is tax-free until such time as the cumulative loans exceed the adjusted cost basis of the policy, at which point the excess becomes taxable.

Correct answer: The loan itself is not considered taxable income, but any interest paid on the loan is generally not tax-deductible for personal use.

Explanation: Policy loans are generally not considered taxable income when taken from a life insurance policy in Canada. However, interest paid on such loans is typically not tax-deductible unless the loan is used for income-producing purposes, as per the Income Tax Act.