A Canadian corporation owns a 'key person' life insurance policy on its CEO. Upon the CEO's death, the corporation receives a $1,000,000 death benefit. How is this death benefit generally treated for income tax purposes?

Question: A Canadian corporation owns a 'key person' life insurance policy on its CEO. Upon the CEO's death, the corporation receives a $1,000,000 death benefit. How is this death benefit generally treated for income tax purposes?

Answer options: ✅ It is received tax-free by the corporation.

• It is fully taxable as active business income.
• It is taxable as investment income (passive income).
• It is added to the corporation's Capital Dividend Account (CDA) for tax-free distribution to shareholders.

Correct answer: It is received tax-free by the corporation.

Explanation: Death benefits from life insurance policies where a corporation is the beneficiary are generally received tax-free by the corporation. This aligns with the tax-exempt status of life insurance death benefits to beneficiaries as per the Income Tax Act (Canada).