Which of the following describes the taxation of death benefits paid from a life insurance policy in Canada?

Question: Which of the following describes the taxation of death benefits paid from a life insurance policy in Canada?

Answer options: ✅ Generally received tax-free by the beneficiary.

• Taxed as regular income in the year received by the beneficiary.
• Subject to capital gains tax if the policy has accrued a significant cash value.
• Taxed as a dividend in the hands of the beneficiary.

Correct answer: Generally received tax-free by the beneficiary.

Explanation: In Canada, death benefits paid from a life insurance policy are generally received by the named beneficiary on a tax-free basis. This is a fundamental principle of life insurance in Canada, as outlined in the Income Tax Act.