Table of Contents
- 🏦 Tax – RRSP (Part 1): The Ultimate Beginner Guide for LLQP Students
- 🏦 Tax – RRSP (Part 2): Contributions, Carry-Forwards, Withdrawals & Special Programs (LLQP Beginner Guide)
- 👫 Tax – Spousal RRSP (Beginner-Friendly Guide)
- 🔄 Assignment of Life Insurance Policies (Ultimate Beginner Guide for LLQP)
- 💰 Capital Gain Exemption (Lifetime Capital Gains Exemption – LCGE)
- 💼 Understanding Taxable Benefits in Group Insurance (LLQP Beginner Guide)
- ⭐ Policy Loan vs. Collateral Loan — The Beginner’s Ultimate Guide (LLQP)
- 📘 Calculation of ACB and Taxable Policy Gain — The Ultimate Beginner’s Guide (LLQP)
- 🧾 Taxation of Partial Surrenders — The Complete Beginner’s Guide (LLQP-Friendly)
- 🏦 Deduction of Premiums in a Collateral Loan — LLQP Ultimate Beginner Guide
- 🛡️ Exempt vs Non-Exempt Life Insurance Policies — LLQP Beginner’s Ultimate Guide
- 🏢 Corporate Owned Life Insurance & Capital Dividend Account (CDA) — Beginner’s LLQP Guide
- 🩺 Key Person Disability Insurance — Beginner’s LLQP Guide
- 🕰️ Tax Maturity of RRSP — The Ultimate LLQP Beginner Guide (2025)
- 🌟 Charitable Giving in Life Insurance: A Complete Beginner-Friendly Guide (LLQP)
🏦 Tax – RRSP (Part 1): The Ultimate Beginner Guide for LLQP Students
Registered Retirement Savings Plans (RRSPs) are one of the most important tax-planning tools in Canada.
If you’re new to the LLQP, this guide will take you from zero knowledge to confidently understanding the core RRSP tax rules you must know for the exam.
🌟 What is an RRSP?
An RRSP (Registered Retirement Savings Plan) is a government-registered annuity contract that helps Canadians save for retirement while deferring taxes.
🧾 Key Features
- ✔️ Registered with CRA
- ✔️ Tracked under your Social Insurance Number (SIN)
- ✔️ You can open RRSPs at many banks, but CRA views it as one single RRSP
- ✔️ The owner must be the annuitant (no third-party RRSPs)
- ✔️ You can name a beneficiary
💡 Important: You can have many RRSP accounts, but CRA treats them as one plan because all contributions belong to the same SIN.
💡 How RRSP Contributions Work
⏳ Contribution Timing
You can make RRSP contributions anytime during the calendar year.
But if you want it to count for the previous tax year, CRA gives a special window:
📅 Deadline = 60 days after December 31
Example:
To contribute for 2024 → Deadline is March 1, 2025.
🧮 How Your RRSP Limit Is Calculated
Your annual contribution room =
18% of your previous year’s earned income
OR
The annual maximum set by CRA (whichever is lower)
💬 This is one of the most testable LLQP facts!
💼 What Counts as “Earned Income”?
Only specific types of income qualify.
✅ Earned Income (Counts toward RRSP room)
- Salary & wages
- Commissions & bonuses
- Net business income
- Net rental income
- Spousal support received
- Certain research or education grants
❌ Does NOT count as earned income
- Interest, dividends, capital gains
- CPP, OAS, EI, social assistance
- RRSP/RRIF withdrawals
- Pension income
- Royalties
- Income from DPSPs or RPPs
📌 Exam tip: RRSP room is based ONLY on earned income — not investment income.
🧍 Eligibility Rules
🎯 Minimum age
You must be 18 or older to generate RRSP room.
⛔ Maximum age
You can contribute up to December 31 of the year you turn 71.
After that, you must convert your RRSP into:
- A RRIF, or
- An annuity
👉 RRSPs are a “deferred annuity.” Contributions defer tax until retirement income starts.
➖ Reductions to RRSP Room (“Minuses”)
Some factors reduce your RRSP limit.
1️⃣ Pension Adjustment (PA)
If you belong to a Registered Pension Plan (RPP) at work, both you and your employer contribute.
CRA reduces your RRSP room through the PA, which is based on the previous year.
📌 Purpose: Prevents “double dipping” — saving too much through both RRSP + employer pension.
2️⃣ Past Service Pension Adjustment (PSPA)
This applies when your employer:
- Creates a pension plan retroactively, or
- Gives you pension credit for years you worked before the plan existed
This PSPA reduces your RRSP room in the current year.
📝 Usually applies to Defined Benefit (DB) pension plans.
➕ Increases to RRSP Room (“Pluses”)
Some rules increase your available contribution space.
1️⃣ Carry-Forward Room
From age 18 onward, any unused RRSP room never disappears — it accumulates every year.
Example:
If you had $5,000 unused last year and $6,000 unused this year →
You now have $11,000 available.
🎯 Important exam concept: RRSP room can accumulate until age 71.
2️⃣ Lifetime Over-Contribution Buffer
You are allowed to overcontribute up to:
$2,000 (lifetime limit)
But remember:
- ❌ It is not tax deductible
- ✔️ Still grows tax-deferred
- ❌ Going beyond this limit triggers harsh penalties
⚠️ Beware of RRSP Penalties
If you exceed your RRSP limit (beyond the allowed $2,000 buffer), the penalty is:
🚨 1% per month
As long as the excess stays in the plan.
💀 Example:
Excess $5,000 → Penalty $50 per month → $600 per year
This is why monitoring your contribution room is critical.
📘 Summary Cheat Sheet (Exam Gold 🥇)
| Concept | Quick Definition |
|---|---|
| RRSP | Registered annuity for retirement |
| Contribution deadline | 60 days after year-end |
| Contribution limit | 18% of last year’s earned income OR CRA maximum |
| Earned income | Salary, business income, rental income |
| Not earned | Dividends, interest, pensions, CPP |
| Minuses | PA + PSPA |
| Pluses | Carry-forward + $2,000 buffer |
| Max age to contribute | December 31 of year you turn 71 |
| Penalty | 1%/month on excess |
🟦 Quick Notes Box
🔹 RRSPs are always individual — owner = annuitant.
🔹 CRA tracks all RRSP contributions using your SIN.
🔹 Carry-forward room can be used anytime before age 71.
🔹 Over-contribution penalty is one of the most common exam questions.
🏦 Tax – RRSP (Part 2): Contributions, Carry-Forwards, Withdrawals & Special Programs (LLQP Beginner Guide)
Welcome to the ultimate beginner-friendly guide to understanding RRSP taxation (Part 2) for LLQP students.
This section dives deeper into contribution calculations, PA/PPSA deductions, carry-forward rules, withdrawals, HBP, LLP, and key exam concepts — all explained simply with examples, icons, and SEO-friendly structure.
🧮 RRSP Contribution Limit – Step-by-Step Example
Your RRSP contribution limit is based on:
👉 18% of previous year’s earned income,
OR
👉 CRA’s annual maximum (whichever is lower)
✅ Example
Earned income last year: $50,000
18% × $50,000 = $9,000 RRSP room
Even if the CRA max is ~$24,000, you are still limited to $9,000, not the full maximum.
📌 Exam Tip: Your limit is always the lower of 18% of earned income OR CRA’s max.
➖ Pension Adjustments (PA) & Past Service Pension Adjustments (PSPA)
When you participate in a workplace pension, CRA reduces your RRSP room to prevent “double saving.”
🏢 1️⃣ Pension Adjustment (PA)
If you and your employer contribute to a Registered Pension Plan (RPP), CRA applies a PA.
Example:
Employee contribution: $2,000
Employer contribution: (Implied)
→ PA = $2,000
🕰️ 2️⃣ Past Service Pension Adjustment (PSPA)
PSPA occurs when the employer introduces or updates a pension plan retroactively.
Example:
Employer creates a new pension plan and credits you for years worked in the past.
→ PSPA = $2,000
🔢 Putting It All Together
Original RRSP Limit: $9,000
PA: –$2,000
PSPA: –$2,000
New available contribution room = $5,000
📝 Important:
You can still claim the full $9,000 deduction, but you can only deposit up to $5,000 this year.
🟦 Quick Note Box
PA + PSPA reduce how much you can contribute, not how much you can deduct if room exists.
➕ Carry-Forward Room
Carry-forward room is one of the biggest advantages of RRSPs.
Any unused contribution room from past years accumulates indefinitely until age 71.
📘 Example
Unused room accumulated over years: $15,000
Current year limit (after adjustments): $5,000
You can contribute:
➡️ $5,000 (this year’s limit)
➡️ + $15,000 (carry forward)
= $20,000 contribution allowed
➕ $2,000 Lifetime Over-Contribution Allowance
You may exceed your RRSP limit by up to:
⭐ $2,000 (one-time, lifetime)
✔️ Allowed
❌ NOT tax deductible
✔️ Still grows tax-deferred
❌ Anything above this triggers penalty
🚨 Over-Contribution Penalties
If you exceed your RRSP limit by more than the $2,000 allowance:
⚠️ Penalty = 1% per month
👉 Equals 12% per year
👉 Applies until the excess is removed
This is a major LLQP exam point.
⚰️ RRSP Room at Death
Even in the year of death, unused room can be used (e.g., by the legal representative).
But after that:
❌ Unused RRSP room cannot be carried forward beyond age 71
At age 71, all unused room disappears forever.
🧓 Age 71 — Mandatory Conversion
By December 31 of the year you turn 71, your RRSP must be converted into:
✔️ RRIF (Registered Retirement Income Fund)
or
✔️ Annuity
At this point, tax deferral ends and retirement income begins.
💸 RRSP Withdrawals Before Age 71
You can withdraw funds early, but:
❗ Every RRSP withdrawal is fully taxable
Because RRSP contributions are tax-deductible, their Adjusted Cost Base (ACB) = $0.
Therefore, 100% of each withdrawal is taxable income.
Example
Withdraw $5,000 → All $5,000 taxed at your marginal rate.
🟥 Withholding Tax
Banks also withhold tax at source when you withdraw.
But this is only a prepayment — not the final tax.
🟦 Special Box — RRSP Withdrawal Truth
RRSP withdrawals = fully taxable
ACB = 0
Every dollar withdrawn = income
🏠 Exception 1: Home Buyers’ Plan (HBP)
The Home Buyers’ Plan allows first-time homebuyers to withdraw from their RRSP tax-free, if conditions are met.
🎯 HBP Rules
🏡 Must be a first-time home buyer (no home owned in the last 4 years)
🏡 Can withdraw up to $25,000
🏡 Must be for a primary residence, not for rental or business use
🏡 Repay over 15 years
🔢 Repayment Example
Withdraw: $25,000
Repayment: 25,000 ÷ 15 = $1,667 per year
🚨 Missed Repayment
If you skip a payment:
→ The missed portion becomes taxable income that year.
⚰️ If You Die
Any unpaid HBP balance gets added to your income in the year of death.
🎓 Exception 2: Lifelong Learning Plan (LLP)
The Lifelong Learning Plan allows RRSP withdrawals for education.
🎓 LLP Rules
📘 Withdraw up to $10,000 per year
📘 Maximum $20,000 total
📘 Must be for eligible full-time education
📘 Repayment period = 10 years
📘 Repayments start a couple of years after schooling ends
💥 Missed Repayment
Unpaid amount → added to taxable income for that year.
⚰️ Year of Death
Outstanding balance → added to income.
🔥 The ONLY Two Tax-Free Withdrawal Exceptions
✔️ HBP – Home Buyers’ Plan
✔️ LLP – Lifelong Learning Plan
All other withdrawals:
❌ Withholding tax
❌ Fully taxable at your marginal rate
This is heavily tested on LLQP.
❌ Why You Should Never Cash Out Your RRSP
Cashing out the entire amount (e.g., $400,000):
➡️ Entire amount becomes taxable income
➡️ Could push you into the highest tax bracket
➡️ Massive tax bill
RRSPs are meant to provide retirement income, not emergency funds.
📘 LLQP Exam Quick Summary (Bookmark This!)
Contribution Rules
- Limit = 18% previous year’s earned income OR CRA maximum
- PA + PSPA reduce RRSP room
- Carry-forward never expires until age 71
- $2,000 lifetime excess allowed (not deductible)
Withdrawals
- Fully taxable (ACB = 0)
- Withholding tax applies
- Only exceptions: HBP and LLP
Age Rules
- Must stop contributing at age 71
- Must convert RRSP to RRIF/annuity at age 71
👫 Tax – Spousal RRSP (Beginner-Friendly Guide)
A Spousal RRSP is one of the most powerful tools for income splitting, tax reduction, and retirement planning for couples in Canada. If you’re studying LLQP and have zero background in tax or finance, this guide will give you everything you need to understand the concept clearly and confidently.
💡 What Is a Spousal RRSP?
A Spousal RRSP is an RRSP you contribute to in your spouse or common-law partner’s name.
- You (the contributor) get the tax deduction 💰
- Your spouse owns the RRSP and will withdraw it later in retirement
This strategy is used when one partner earns much more than the other.
📌 Purpose:
➡️ Lower the household’s overall taxes — now and in retirement
➡️ Split retirement income to avoid high tax brackets
➡️ Prevent OAS clawbacks in retirement
🎯 Why Use a Spousal RRSP?
1️⃣ Lower Taxes Today
If you are in a high tax bracket and your spouse is in a low bracket, contributing to their RRSP means:
- You get a large deduction (because your income is high)
- In retirement, your spouse withdraws the money at a lower tax rate
🔍 Example:
- You: 45% tax bracket
- Spouse: 15% tax bracket
If you shift income to your spouse via a Spousal RRSP →
🚀 Huge tax savings, because $ taxed at 45% becomes taxed at 15%.
2️⃣ Avoid OAS Clawbacks in Retirement
🧓 Old Age Security (OAS) starts getting clawed back when a retiree’s income goes above approx. $80,000 (adjusted yearly).
If all retirement income is in your name (ex: $120,000 at age 65+), you will lose some or all of your OAS.
But if you income-split using a Spousal RRSP:
- You withdraw $60,000
- Your spouse withdraws $60,000
➡️ Both incomes are below OAS clawback level
➡️ You both keep your OAS
➡️ Thousands saved each year
🧮 Who Gets the Contribution Room?
This is the #1 thing beginners get confused about.
✔️ Contribution room belongs to the contributor, not the spouse.
If your RRSP limit is $20,000, you may:
- Put $20,000 into your RRSP
- Put $20,000 into your spouse’s RRSP
- Or split it in any combination
💡 Your spouse’s own RRSP room is not affected.
Your contribution only reduces your room.
🏦 Withdrawal Rules: The 3-Year Attribution Rule
This is the most important rule in spousal RRSP taxation.
📌 If your spouse withdraws money within:
- the current year
- next 2 years
= 3-year window
- next 2 years
➡️ The withdrawal is taxed to YOU, not your spouse.
This prevents people from contributing for a deduction and withdrawing immediately at a low tax rate.
📘 Example of Attribution Rule
Assume you contributed:
- Year 1 → $10,000
- Year 2 → $10,000
- Year 3 → $10,000
- Year 4 → $10,000
Total = $40,000
If your spouse withdraws in Year 4:
- Contributions in Year 2, 3, 4 → within 3-year window
➡️ You are taxed on $30,000 - Contribution from Year 1 → outside window
➡️ Spouse is taxed on $10,000
📘 Investment growth (ex: $10,000 earnings) is ALWAYS taxed to the spouse, not you.
🔥 Important Warning for LLQP Students
⚠️ Marital Breakdown
If a relationship breaks down and the spouse withdraws the funds:
🚫 They get the money
😱 YOU pay the tax (if contributions were within 3-year window)
Planners must be aware of this risk.
⏳ When Must a Spousal RRSP Be Converted?
A Spousal RRSP follows the same rules as any RRSP.
📌 By December 31 of the year your spouse turns 71, the plan must be converted into one of the following:
- RRIF (Registered Retirement Income Fund)
- Life Annuity
- Or cash withdrawal (very rare because fully taxable)
⭐ Summary: Why Spousal RRSPs Matter in LLQP
| Benefit | Why It Matters |
|---|---|
| 💸 Immediate tax savings | Contributor gets deduction at high rate |
| 👩❤️👨 Retirement income splitting | Both spouses taxed in lower brackets |
| 🧓 Protects OAS payments | Avoids clawback caused by high income |
| ⚠️ Has 3-year attribution rule | Prevents abuse and affects withdrawal planning |
| 👍 Flexible contributions | Uses contributor’s RRSP room only |
📦 Pro Tip Box for LLQP Exam
Remember:
- Contributor = gets the deduction
- Spouse = owns the RRSP & pays tax on future withdrawals
- Withdraw within 3 years → taxed back to contributor
- Goal = income splitting + OAS protection
📝 Final Thoughts
A Spousal RRSP is one of the simplest and most effective retirement tax-planning tools for Canadian couples. As an LLQP learner, you must understand:
- how contributions work
- who gets the tax deduction
- how income splitting works
- how the attribution rule prevents misuse
Mastering this topic will help you advise clients confidently and pass your LLQP exam with ease.
🔄 Assignment of Life Insurance Policies (Ultimate Beginner Guide for LLQP)
Assigning a life insurance policy means transferring ownership of the policy from one person to another. Although it may sound simple, it carries major legal and tax consequences, which LLQP students must fully understand.
This guide breaks everything down in a clean and easy way—perfect for beginners!
🧭 What Does “Assignment of Policy” Mean?
👉 Assignment = Transferring ownership of a life insurance policy to someone else.
Once assigned, the new owner controls everything, including:
- beneficiary designations
- premium payments
- surrender decisions
- policy loans
- rights to the cash value
Assignment can happen during life or at death, and the tax treatment depends heavily on who receives the policy.
🔥 Two Types of Assignments (But Focus on One)
There are two overall types:
1. Absolute Assignment (Complete Transfer) 🏆
- Full ownership permanently transferred
- No payment expected (often a gift)
- New owner gets all rights
- Beneficiary designations automatically change
- Most common type in LLQP exam questions
- This is the focus of the taxation rules
2. Collateral Assignment (Temporary Pledge)
Used when pledging a policy to a lender as security.
👉 Not the focus here.
🎯 Key Concept: Arm’s Length vs Non-Arm’s Length Transfer
Understanding this is critical for tax purposes.
👥 Arm’s Length (Strangers / Not Immediate Family)
Includes:
- friends
- cousins
- siblings
- uncles / aunts
- business partners
- unrelated individuals
➡️ Tax rules are strict
➡️ Always triggers a deemed disposition
👨👩👧 Non-Arm’s Length (Immediate Family)
Includes:
- spouse or common-law partner
- children
- grandchildren
- great-grandchildren
➡️ Eligible for rollover
➡️ No immediate tax at time of transfer
💥 ABSOLUTE ASSIGNMENT – ARM’S LENGTH TRANSFER
This is the most heavily tested scenario.
📌 Tax Rule:
➡️ Always causes a deemed disposition at fair market value (FMV)
➡️ The gain is taxable immediately
🧮 Example: Assigning a Policy to a Brother
Jack owns a life insurance policy:
- Adjusted Cost Base (ACB): $34,000
- Cash Surrender Value (CSV / FMV): $61,000
He transfers it to his brother Jim.
🎯 Tax effect:
Policy gain = CSV − ACB
= $61,000 − $34,000 = $27,000 (taxable)
Jack must report the $27,000 gain on his tax return.
If his marginal rate is 35% → Tax = $9,450.
📌 For the NEW owner (Jim):
- His new ACB = $61,000
- No double taxation; taxes already paid up to FMV.
📝 Important Note Box
📘 Note: Even if the assignment happens at death (e.g., contingent owner), the same deemed disposition applies for arm’s length transfers.
💖 ABSOLUTE ASSIGNMENT – TRANSFER TO SPOUSE (NON-ARM’S LENGTH)
This scenario is treated very differently.
✔️ Eligible for Spousal Rollover
This means:
➡️ No deemed disposition
➡️ No tax at transfer
➡️ Spouse receives the policy at original ACB
Using the earlier example:
- ACB = $34,000
- CSV = $61,000
Under rollover → Spouse receives the policy at ACB $34,000.
🧨 Attribution Rules for Spouse Transfers
This is extremely important.
🧭 Future withdrawals by the spouse:
If the spouse later surrenders the policy → the tax may attribute back to the original owner.
📌 Example:
Later CSV = $94,000
Spouse gain = 94,000 − 34,000 = $60,000
➡️ Jack pays the tax, not the spouse, because of attribution.
🔁 Can They Opt Out of the Rollover?
YES.
If Jack opts out, then:
- He pays tax on the original gain now
- Wife gets new ACB = FMV = $61,000
- Future gains taxed to spouse, not Jack
👶 TRANSFERS TO CHILDREN (NON-ARM’S LENGTH)
⚠️ The rules here differ from spouse transfers.
Parents and grandparents often buy policies for a child or grandchild and later transfer them.
💚 Rollover allowed when:
➡️ Child is 18 or older
➡️ Transfer is directly to the child (not through a trust)
This allows parents to gift policies with no tax triggered.
🧒 Example: Parent → Adult Child
Mary owns a policy on her daughter Sarah.
At age 18:
- ACB = $16,000
- CSV = $29,500
Transfer occurs → no tax
Sarah keeps the same ACB = $16,000.
⏩ Years later…
At age 25, Sarah surrenders:
CSV = $40,000
Gain = 40,000 − 16,000 = $24,000
→ Sarah pays tax (usually lower bracket).
⚠️ Attribution Rules for Minor Children
If transferred before age 18, and the minor cashes it before turning 18:
➡️ Tax attributes back to the parent.
Once the child is 18:
➡️ Attribution ends
➡️ Child pays their own tax on gains
🧾 Special Case: Transfer to a Trust
If transferred to a trust for a child:
❌ No rollover
❌ Trust is a separate legal entity
➡️ Deemed disposition occurs immediately
➡️ Tax payable right away
🧠 Summary Table (Exam-Friendly)
| Scenario | Rollover Allowed? | Tax at Transfer? | Who Pays Tax Later? |
|---|---|---|---|
| Arm’s length (friends, siblings) | ❌ No | ✅ Yes (deemed disposition) | New owner, on gains above FMV |
| Spouse | ✅ Yes | ❌ No | Attribution → original owner may pay |
| Spouse (opt-out) | ❌ No | ✅ Yes | Spouse |
| Child ≥18 | ✅ Yes | ❌ No | Child |
| Child <18 | ❌ No (attribution) | ❌ No | Parent (until child is 18) |
| Transfer to trust | ❌ No | ✅ Yes | Trust |
💬 Final Takeaway for LLQP Students
Assignments of life insurance policies matter because:
- They determine who is taxed and when
- They impact estate planning
- They affect wealth transfers
- They change ownership and beneficiary rights
The BIG 3 things to memorize:
1️⃣ Arm’s length → deemed disposition & tax now
2️⃣ Spouse/child → rollover possible (no tax now)
3️⃣ Attribution rules may cause the original owner to pay tax later
Master these and you will confidently handle LLQP exam questions on policy assignment.
💰 Capital Gain Exemption (Lifetime Capital Gains Exemption – LCGE)
The Capital Gain Exemption, officially known as the Lifetime Capital Gains Exemption (LCGE), is one of the most powerful tax advantages available to Canadian business owners. If you’re new to LLQP or taxation, this guide will explain everything in simple, clear language with examples and visual structure.
🧭 What Is the Capital Gain Exemption?
The LCGE allows an individual to pay no tax on a portion of the capital gain when selling shares of a Canadian-Controlled Private Corporation (CCPC).
👉 In other words:
If someone owns shares of a qualifying private Canadian business and sells their shares—or dies owning them—they can eliminate a large amount of capital gains tax.
🇨🇦 What Counts as a Canadian-Controlled Private Corporation (CCPC)?
A corporation is a CCPC if:
- ✔️ It is private, not publicly traded
- ✔️ It is incorporated in Canada
- ✔️ More than 50% (majority) is owned by Canadian residents
- ❌ Not controlled by foreign owners
- ❌ Not controlled by public corporations
If the company is not a CCPC → No exemption applies.
📌 When Does the Exemption Apply?
The LCGE applies when there is a disposition of shares, which includes:
- ✔️ Selling shares
- ✔️ Gifting shares
- ✔️ Passing away (deemed disposition at death)
👉 It does not matter how the shares are disposed—only that they are CCPC shares at the time of disposition.
📈 How Much Is the Exemption?
The LCGE is indexed to inflation.
It started at $800,000 and increases almost every year.
For example:
- In 2017, the exemption was $835,716.
- Today, it is higher (always check the current year’s CRA amount).
👉 LLQP tip: They will not ask you to memorize specific yearly limits, but you must know that the exemption increases annually due to indexation.
🧠 Key Terms to Understand
🔹 Adjusted Cost Base (ACB)
The amount originally invested to buy the shares.
This portion is always tax-free.
🔹 Fair Market Value (FMV)
The current value of the business or shares at the time of sale or death.
🔹 Capital Gain
FMV − ACB
This is the gain that might be taxable—but the LCGE can reduce it significantly.
📘 Example: How LCGE Reduces Taxes
Let’s look at a simple version of the example.
👤 Bill owns a CCPC
- FMV at death: $2,400,000
- ACB (original investment): $200,000
Step 1: Calculate the capital gain
$2,400,000 − $200,000 = $2,200,000 gain
Step 2: Apply LCGE
2017 LCGE amount: $835,716
Remaining taxable gain:
$2,200,000 − $835,716 = $1,364,284
Step 3: Apply inclusion rate
Only 50% of capital gains are taxable in Canada.
Taxable amount:
$1,364,284 × 50% = $682,142
Step 4: Apply Bill’s marginal tax rate (45%)
Tax owing:
$682,142 × 45% = $306,964
✔️ Result
Out of the $2.4 million business value:
- 💵 Only $306,964 is taxed
- 💚 More than $2 million passes to his estate tax-free
📦 Why This Is So Powerful
The LCGE:
- 🛡️ Protects small business owners
- 📉 Reduces tax on business sales
- 📊 Encourages entrepreneurship
- 👨👩👧 Helps families keep more wealth at death
- ⭐ Can eliminate hundreds of thousands in tax
For LLQP learners:
Understanding this is essential for topics involving succession planning, estate transfers, and business-owner insurance strategies.
🟥 IMPORTANT: When the LCGE Does NOT Apply
You cannot use this exemption when selling:
- ❌ Shares of public companies
- ❌ Shares of foreign corporations
- ❌ Shares in private companies controlled by non-residents
- ❌ Assets of the business (it must be shares, not business assets)
LLQP exam questions often test this distinction.
💡 Special Note Box
📘 Note: The LCGE applies only to shares, not the sale of equipment, buildings, or other business assets.
📘 Note: The exemption amount increases over time—always check the current limit.
🧭 How This Connects to Insurance Planning (LLQP Insight)
Insurance advisors must understand LCGE because:
- Business owners often use life insurance for succession planning
- Shareholders face a deemed disposition at death
- Advisors must know how tax rules affect estate transfers
- Corporations may buy life insurance to fund buy-sell agreements
Understanding LCGE helps advisors recommend better insurance strategies.
🧠 Quick Summary (Perfect for Exam Review)
- ✔️ Applies only to CCPC shares
- ✔️ Large portion of gain becomes tax-free
- ✔️ Exact exemption amount increases every year
- ✔️ Applies at sale, gift, or death
- ✔️ Greatly reduces capital gains tax
- ✔️ One of the most valuable tax planning tools in Canada
💼 Understanding Taxable Benefits in Group Insurance (LLQP Beginner Guide)
Taxable benefits are one of the most confusing topics in Life Insurance Taxation under the LLQP curriculum — especially when it comes to disability insurance and employer-paid premiums.
This section breaks everything down in simple, exam-friendly language, with examples, icons, and clear explanations.
🧠 What Is a Taxable Benefit?
A taxable benefit occurs when an employee receives something of value from their employer, and the Income Tax Act requires that value to be treated as income.
👉 Key condition:
This applies ONLY in employer-employee relationships.
Not contractors. Not self-employed individuals.
If your employer pays for something that protects or benefits you → it may be taxable.
💡 The Key Rule (Memorize This!)
**“If the employer pays the premium, the benefit is taxable.
If the employee pays the premium (with after-tax dollars), the benefit is tax-free.”**
✔️ Applies especially to disability insurance benefits
✔️ You will see this often in LLQP exam questions
⚖️ Why Does This Happen?
The CRA follows a simple principle:
Pay tax now or pay tax later.
If the employer pays the premium → you didn’t pay tax upfront, so you pay tax when the benefit is paid out.
If you pay the premium (using after-tax income) → you already paid tax upfront, so the benefit is tax-free.
📦 Scenario 1 – Employer Pays 100% of Premium
❗ Benefit is Fully Taxable
👔 Employer pays entire disability premium
🧾 Premium does NOT appear on employee’s T4
💰 Disability benefits paid out later → 100% taxable
Example
- Employer pays: $1,000 per year
- Employee contribution: $0
- Disability benefit received later: $3,000/month
👉 Result:
Every $3,000 payment is taxable income.
📦 Scenario 2 – Employer Pays, BUT Shows Premium on T4
✔️ Benefit is Tax-Free
This is a special case.
If the employer pays the premium but includes it as a taxable benefit on your T4, the CRA treats it as if:
YOU paid the premium using after-tax dollars.
So later, when you get disability income:
✔️ The benefit is completely tax-free
✔️ Even though the employer physically paid the insurer
📝 LLQP Tip Box:
If it appears on your T4 → you paid tax on it → benefit is tax-free.
📦 Scenario 3 – Employee Pays 100%
✔️ Benefit is Completely Tax-Free
If the employee pays the entire premium from their own after-tax salary:
✔️ Benefits are not taxable
✔️ Simple, clean, and common in private disability plans
🔄 Scenario 4 – Mixed Contributions (Employer + Employee)
This is where most LLQP students get confused — but the rule is still simple.
Each dollar of disability benefit is treated based on:
- Whether YOU contributed to the premiums
- How much you contributed over time
🟦 Key Concept: Refund of Premium
The amount you contributed over the years is treated as tax-free when benefits are paid.
Everything above what you contributed is taxable.
🔍 Example: Mixed Contributions
Tom’s situation:
- Total annual premium: $1,000
- Tom pays: $500
- Employer pays: $500
- They do this for 6 years
- Tom’s total contribution: $500 × 6 = $3,000
Tom becomes disabled:
- Receives $3,000/month for 10 months
- Total benefit: $30,000
Tax calculation:
| Portion | Amount | Tax Treatment |
|---|---|---|
| Tom’s contribution (6-year total) | $3,000 | ❌ Tax-Free (“Refund of Premium”) |
| Remaining benefit | $27,000 | ✔️ Taxable |
👉 CRA logic:
You paid $3,000 with after-tax dollars → you get back $3,000 tax-free.
You did NOT pay tax on the employer’s portion → that part becomes taxable.
🧾 How CRA Determines Taxable Benefit Amounts
CRA adds up:
- 💵 All premiums the employee paid (after-tax)
- 💵 Total disability benefits received
- 📘 The first part of benefits equal to employee contributions → tax-free
- 📘 Everything above that → taxable
Taxable amounts appear on your T4 and must be included on the T1 personal tax return.
📘 Quick Definitions Box
Taxable Benefit
A benefit provided by an employer that must be taxed.
After-Tax Dollars
Money left after income tax is deducted from your salary.
Refund of Premium
Amount equal to what the employee contributed — treated as tax-free when benefits are paid.
Disability Benefit
Monthly income paid if you are unable to work due to injury or illness.
⭐ Ultimate LLQP Summary (Perfect for Exam Revision)
✔️ Employer pays premium → benefit taxable
✔️ Employer pays but shows on T4 → benefit tax-free
✔️ Employee pays premium → benefit tax-free
✔️ Mixed contributions → employee contributions refunded tax-free; rest taxable
✔️ Applies only to employer-employee relationships
✔️ Disability benefits are the most commonly tested taxable benefits in LLQP
⭐ Policy Loan vs. Collateral Loan — The Beginner’s Ultimate Guide (LLQP)
Understanding how policy loans and collateral loans work is essential for anyone entering the LLQP program—especially because these loans can have very different tax consequences. This guide breaks everything down in ultra-simple terms so you can master the exam and real-world applications.
🧩 What Are These Two Types of Loans?
Before comparing, let’s define them clearly:
👉 Policy Loan
You borrow directly from your insurance company, using your own life insurance policy as the collateral.
👉 Collateral Loan
You borrow from a bank or financial institution but pledge your life insurance policy as collateral (security) for that loan.
🔥 Key Differences at a Glance
| Feature | Policy Loan | Collateral Loan |
|---|---|---|
| Who gives you the loan? | Insurance company | Bank / lending institution |
| Does it affect the policy? | YES — reduces ACB | NO — policy stays intact |
| Is it taxable? | Yes, if loan > ACB | No (loan is tax-free) |
| Impact on future taxes? | Can trigger policy gain | No impact |
| Interest deductibility? | Yes, if used to earn income | Yes, if used to earn income |
🏦 1. Understanding Policy Loans (Borrowing From the Insurance Company)
When you take a policy loan, your insurer gives you money out of your policy’s own cash value.
This seems easy—but tax rules get involved.
💡 How Tax Works in a Policy Loan
A policy loan is treated the same as a withdrawal from the policy.
❗ Taxable Portion = Loan Amount – ACB (Adjusted Cost Basis)
- ACB = The amount of after-tax money YOU have put into the policy
- When you borrow more than your ACB → the difference becomes taxable income
📌 Example
Tom’s policy:
- Cash Value: $50,000
- ACB: $10,000
Tom takes a loan of $15,000 from the insurer.
Taxable policy gain:
$15,000 (loan) – $10,000 (ACB) = $5,000 taxable
👉 Even though it’s called a “loan,” the taxable gain works like a withdrawal.
📉 Policy Loans Reduce the ACB
When you borrow from the insurer:
➡️ Your ACB decreases
➡️ This increases the chance of future taxable gains
Example
Tom’s ACB before loan: $10,000
Loan taken: $5,000
New ACB = $10,000 – $5,000 = $5,000
Lower ACB = higher future tax risk.
🟢 Can You Repay a Policy Loan?
Yes — and this part is huge:
✔️ When you repay a policy loan:
- Your ACB increases again
- You may get a tax deduction up to the amount you were taxed earlier
- It avoids being taxed twice for the same money
📌 This protects from double taxation.
🔹 Simple Example
Tom’s policy:
- Cash Value = $50,000
- ACB = $10,000
Step 1: Take a $15,000 loan
- ACB = $10,000 → first $10,000 is safe, no tax
- Extra $5,000 = taxable
Step 2: Repay $15,000
- ACB goes up by $15,000
- New ACB = $15,000
- Tom avoids paying tax again on the $5,000
🏛️ 2. Understanding Collateral Loans (Borrowing From a Bank)
A collateral loan works very differently… and more favorably.
You go to a bank, and the bank gives you a loan.
Your life insurance policy’s cash value is used as collateral (security).
⭐ WHY THIS IS POWERFUL
The loan is not coming from your policy → so it has:
✔ No tax
✔ No impact on ACB
✔ No policy gain
✔ No reporting required
📌 Example
Your policy:
- Cash Value: $50,000
Option 1 — Policy Loan
→ Borrow $50,000 from insurer → triggers tax if ACB is lower
Option 2 — Collateral Loan
→ Borrow $50,000 from a bank → Tax-free
💥 Same money… completely different tax consequences.
💼 When Borrowed Money is Used for Business or Investments
Whether it’s a policy loan or collateral loan,
interest may be tax-deductible if the borrowed money is used to generate income.
Examples of income-producing uses:
- Investing in stocks, bonds, ETFs
- Buying rental property
- Growing a business
- Starting a new business activity
📘 Rule:
If the money is used to earn business or investment income, the interest can be deductible.
🎁 Why Business Owners Love Collateral Loans
Many entrepreneurs:
✔ build up large cash value in permanent policies
✔ use the policy as collateral
✔ take large tax-free loans from banks
✔ deduct interest (if used “to earn income”)
This strategy lets them access funds without triggering tax and without reducing policy strength.
🎀 Bonus Topic: Participating Whole Life Dividends (and Tax Rules)
This applies ONLY to participating whole life policies.
🟢 Tax-Free Uses (no tax at all):
- Buy paid-up additions
- Buy term insurance
- Increase coverage
- Use as automatic premium loan
- Reduce premiums
📦 These options are considered insurance benefits, not taxable income.
🔵 Taxable Situations (two cases)
1️⃣ Taking dividends in cash
Taxable amount = Dividend received – ACB portion
2️⃣ Leaving dividends on deposit
If they earn interest (secondary income),
the interest is taxable as “Part II income.”
👉 But the dividend itself (the original amount) is not taxable.
📘 Summary Table — Dividend Taxation
| Dividend Use | Taxable? |
|---|---|
| Buy paid-up additions | ❌ No |
| Buy term insurance | ❌ No |
| Reduce premiums | ❌ No |
| Leave on deposit (interest earned) | ✔ Yes — interest only |
| Take dividends in cash | ✔ Yes — if > ACB |
🧠 Final Takeaways (Must-Know for LLQP Exam)
Policy Loan (from insurer)
- ✔ Easy access to cash
- ❌ Can trigger taxable policy gain
- ❌ Reduces ACB
- ✔ Repayment can restore ACB & allow deduction
Collateral Loan (from bank)
- ✔ Tax-free
- ✔ Doesn’t change ACB
- ✔ Doesn’t trigger policy gain
- ✔ Interest may be deductible
- ✔ Ideal for business/investment planning
Participating Policy Dividends
- Taxable only if:
• Taken as cash
• Left on deposit and earning interest
📦 ⭐ Exam-Ready Memory Trick
“Policy Loan = Policy Impact + Possible Tax
Collateral Loan = No Impact + No Tax”
📘 Calculation of ACB and Taxable Policy Gain — The Ultimate Beginner’s Guide (LLQP)
Understanding Adjusted Cost Base (ACB) and Taxable Policy Gain is one of the MOST important parts of life insurance taxation.
If you’re new to LLQP and feel overwhelmed—don’t worry. This guide breaks everything down using simple language, visuals, and examples that even a total beginner can understand.
🧠 What Is ACB (Adjusted Cost Base)?
ACB is the amount of your own money that went into a life insurance policy after removing the cost of insurance and certain credits.
Think of ACB like the “true cost” of your policy.
It shows how much of your payout you can get tax-free.
🟦 Formula (Non-Participating Policy)
ACB = Total Premiums Paid – NCPI
🟩 Formula (Participating Policy)
ACB = Total Premiums Paid – NCPI – Dividends Received
💬 Key Terms Explained (Ultra Simple)
📌 Premiums Paid
The total amount you’ve paid into the policy over the years.
📌 NCPI (Net Cost of Pure Insurance)
The “insurance protection” portion of the premiums:
→ the cost of covering your life
→ NOT the savings/investment portion
You must always subtract NCPI when calculating ACB.
📌 Dividends (ONLY in Participating Policies)
Money paid back to you by the insurer.
Dividends reduce your ACB.
🏦 Part 1: Calculating ACB in a Non-Participating Policy
🧮 Example
- Premiums paid: $2,000 × 10 years = $20,000
- NCPI: $5,000
✔ ACB = $20,000 – $5,000 = $15,000
This $15,000 is tax-free if withdrawn.
🏦 Part 2: Calculating ACB in a Participating Policy (With Dividends)
Participating policies pay dividends.
The dividends you received must be subtracted from your ACB.
🧮 Example
- Premiums paid: $2,500 × 10 years = $25,000
- NCPI: $5,000
- Dividends received: $6,000
✔ ACB = $25,000 – $5,000 – $6,000 = $14,000
➡ The ACB is LOWER than the non-participating policy because dividends reduce the ACB.
🟦 Special Note Box
📘 NCPI is based on:
- Age
- Gender
- Smoking status
- Amount of insurance
👉 NCPI does not change whether the policy is participating or non-participating.
🔥 Part 3: What Is a Policy Gain?
Any amount you receive above the ACB is a taxable policy gain.
🔢 Formula
Policy Gain = Cash Surrender Value (CSV) – ACB
🧮 Part 4: Calculating Taxable Policy Gain (Non-Participating Example)
Scenario
- CSV (cash surrender value): $50,000
- ACB: $15,000
✔ Policy Gain = $50,000 – $15,000 = $35,000
This $35,000 is taxable interest income, not capital gains.
🔥 Important
Life insurance gains = interest income taxation, meaning 100% is taxable at your marginal tax rate.
📉 Part 5: How Much Tax Do You Actually Pay?
Example
- Policy gain: $35,000
- Marginal tax rate (MTR): 35%
✔ Tax Owed = $35,000 × 35% = $12,250
💵 What You Keep
$50,000 (CSV payout) – $12,250 (tax) = $37,750 net to you
🟩 Part 6: Calculating Taxable Policy Gain (Participating Policy Example)
Using the ACB we calculated earlier:
- CSV: $50,000
- ACB: $14,000
✔ Policy Gain = $50,000 – $14,000 = $36,000
Now calculate tax:
- $36,000 × 35% = $12,600 tax owed
⚠️ Important Exam Note Box
Only policies acquired on or after Dec 1, 1982 use these rules.
Older policies follow different tax rules.
📊 Summary Table (For Exam)
| Item | Non-Participating | Participating |
|---|---|---|
| ACB Formula | Premiums – NCPI | Premiums – NCPI – Dividends |
| Dividends Affect ACB? | ❌ No | ✔ Yes |
| Policy Gain Calculation | CSV – ACB | CSV – ACB |
| Tax Type | Interest Income | Interest Income |
| % Taxable | 100% | 100% |
🔑 Final Exam-Ready Steps
Step 1: Calculate ACB
Non-par: premiums – NCPI
Par: premiums – NCPI – dividends
Step 2: Calculate Policy Gain
CSV – ACB
Step 3: Apply Marginal Tax Rate
Policy Gain × MTR = Tax Owed
—
🎓 Memory Trick (LLQP Gold)
👉 “ACB = what you paid; Gain = what you earned; Tax = what you owe.”
🧾 Taxation of Partial Surrenders — The Complete Beginner’s Guide (LLQP-Friendly)
When studying Life Insurance Taxation Principles for LLQP, one of the most confusing areas is partial surrenders. Most people understand a full surrender—you cancel your policy and take all the money out. But partial surrenders?
👉 They let you access money without cancelling your entire policy… and yes, they still come with tax rules.
This guide is written for total beginners, using simple language, step-by-step math, and real examples. By the end, you’ll fully understand how partial surrenders work, when they apply, and how they are taxed on the LLQP exam.
🧠 What Is a Partial Surrender?
A partial surrender means you take value out of a life insurance policy without cancelling the whole thing.
There are two types of partial surrenders:
1️⃣ Reducing Coverage (Most common in Whole Life)
You lower your death benefit, and part of your policy becomes “unsheltered.” This creates a taxable gain.
2️⃣ Withdrawing Cash (Only available in Universal Life)
You pull actual cash out of the investment account inside the policy.
💬 Why Do People Choose a Partial Surrender?
✔ They need money
✔ They don’t want to cancel the entire policy
✔ They want to keep some insurance protection
✔ They want flexibility and access to built-up value
Partial surrenders allow this.
🟥 Full Surrender vs Partial Surrender (Quick Comparison)
| Feature | Full Surrender | Partial Surrender |
|---|---|---|
| Policy stays active? | ❌ No | ✔ Yes |
| Access to cash? | ✔ Full | ✔ Partial |
| Coverage remains? | ❌ No | ✔ Reduced or unchanged |
| Taxable? | ✔ Yes (policy gain) | ✔ Yes (pro-rated gain) |
📦 Important Note Box
🟦 Whole Life Policies:
- Cannot withdraw cash
- Only option is reduce coverage (or borrow)
🟩 Universal Life Policies:
- You can withdraw cash
- You can reduce coverage
- You have both partial surrender options
🧮 PART 1 — Partial Surrender by Reducing Coverage (Whole Life & Universal Life)
Reducing the death benefit releases a portion of the cash value, which becomes taxable if it exceeds your ACB.
This method is ALWAYS tested on LLQP.
🔍 Example Breakdown — Reducing Coverage
Jessie’s Policy:
- Original coverage: $200,000
- Reduced coverage: $150,000
- Reduction amount: $200,000 − $150,000 = $50,000
- Reduction %: $50,000 ÷ $200,000 = 25%
Policy Values:
- Cash surrender value (CSV): $24,000
- ACB (Adjusted Cost Base): $10,000
🚫 CSV ≠ Coverage Amount
These two are completely different things.
1️⃣ Coverage Amount (Death Benefit)
- This is the insurance payout when the insured dies.
- It’s the big number on the policy:
Example: $200,000 coverage.
Think of it like:
“How much insurance protection do I have?”
2️⃣ Cash Surrender Value (CSV)
- This is the savings/investment portion inside the policy.
- It grows over time based on premiums, interest, dividends, etc.
- If you canceled the policy today, CSV is the amount the insurer gives you.
Example: Jessie’s policy had CSV of $24,000.
Think of it like:
“How much money is inside the policy?”
🧩 Step 1 — Determine Exposed CSV
25% of CSV becomes unsheltered:
25% × $24,000 = $6,000
This is the “payout portion” connected to the reduced coverage.
🧩 Step 2 — Calculate Pro-Rated ACB
ACB is also reduced by the same percentage:
25% × $10,000 = $2,500
This is Jessie’s non-taxable portion.
🧩 Step 3 — Determine the Taxable Policy Gain
Taxable gain = exposed CSV – prorated ACB
$6,000 – $2,500 = $3,500
This is taxed as interest income.
🧩 Step 4 — Calculate Tax
Jessie’s tax rate: 35%
$3,500 × 35% = $1,225
📘 Final Result
Jessie owes $1,225 in taxes because she reduced her coverage by 25%.
🟨 Exam Tip Box
📌 Partial surrender from reducing coverage ALWAYS produces a pro-rated ACB and pro-rated CSV calculation.
📌 Taxable portion = CSV portion – ACB portion
📌 Tax treatment = interest income (100% taxable)
🧮 PART 2 — Partial Surrender by Withdrawing Cash (Universal Life Only)
This method applies ONLY to universal life (UL) policies.
You withdraw cash from the investment account, but your coverage stays exactly the same.
🔍 Example Breakdown — Cash Withdrawal (UL)
Jessie’s UL Policy:
- Coverage: $200,000
- Cash value: $80,000
- ACB: $65,000
- Withdrawal amount: $40,000
🧩 Step 1 — Calculate Pro-Rated ACB
Formula:
Prorated ACB = (Withdrawal ÷ Cash Value) × ACB
Apply the numbers:
40,000 ÷ 80,000 = 0.5
0.5 × 65,000 = $32,500
So $32,500 of the withdrawal is NOT taxable.
🧩 Step 2 — Policy Gain
Withdrawal – prorated ACB:
$40,000 – $32,500 = $7,500
This is taxable interest income.
🧩 Step 3 — Tax Payable
Tax rate: 35%
$7,500 × 35% = $2,625
📘 Final Result
Jessie owes $2,625 in tax for withdrawing $40,000.
🟦 Key Differences Between the Two Partial Surrenders
| Feature | Reduce Coverage | Cash Withdrawal |
|---|---|---|
| Available in Whole Life | ✔ Yes | ❌ No |
| Available in Universal Life | ✔ Yes | ✔ Yes |
| Coverage changes? | ✔ Reduced | ❌ Stays same |
| Creates pro-rated tax calc? | ✔ Yes | ✔ Yes |
| Tax Type | Interest income | Interest income |
🟩 Super Summary (Perfect for LLQP Revision)
Partial Surrender Methods
1️⃣ Reduce coverage → pro-rated CSV + pro-rated ACB → taxable gain
2️⃣ Withdraw cash (UL only) → pro-rated ACB → taxable gain
Tax Formula Always
Taxable Gain = Payout Amount – Prorated ACB
Tax Treatment
Interest income → 100% taxable
🎓 Memory Trick for Exams
💡 “Partial = Pro-Rated.”
Any partial surrender → calculate prorated ACB → find taxable gain.
💡 “Whole Life reduces, UL withdraws.”
🏦 Deduction of Premiums in a Collateral Loan — LLQP Ultimate Beginner Guide
When studying Life Insurance Taxation Principles, one topic that often confuses beginners is using a life insurance policy as collateral for a loan — and whether the premiums become tax deductible.
This guide breaks everything down in the simplest possible way so even a total beginner can understand how collateral assignments work, when premiums are deductible, and how much can be claimed.
Perfect for LLQP exam prep! 🎓✨
🧩 What Is a Collateral Assignment?
A collateral assignment means:
👉 you pledge your life insurance policy to a lender (usually a bank) as security for a loan.
✔ You still own the policy
✔ You keep your beneficiary
✔ The bank only gains the right to the policy if you fail to repay the loan
🟦 Important: Collateral assignment is NOT the same as absolute assignment.
You are not giving ownership away — only using it as security.
🔍 Collateral Assignment vs Absolute Assignment
| Feature | Collateral Assignment | Absolute Assignment |
|---|---|---|
| Ownership changes? | ❌ No | ✔ Yes |
| Beneficiary changes? | ❌ No | ✔ Yes |
| Used as loan security? | ✔ Yes | ❌ Not required |
| Deemed disposition happens? | ❌ No | ✔ Yes |
| Policy gain taxed? | ❌ No | ✔ Yes (CSV − ACB) |
🟩 Key takeaway:
👉 Collateral assignment does NOT trigger any tax just by itself.
💼 Why Do Banks Require a Life Insurance Policy?
Banks often want life insurance as security when they lend money, especially for:
✔ Business expansion
✔ Business loans
✔ Large credit lines
✔ High-risk financing
If the borrower dies, the bank can recover the loan from the policy proceeds.
📘 When Premiums Become Tax-Deductible
Not all premiums are deductible — in fact, the full premium almost never is.
Premium deductions are only allowed when:
✅ The loan is for business purposes
(Personal loans do NOT qualify)
✅ The bank requires the life insurance policy
(Not optional — must be mandatory)
✅ Only the NCPI (Net Cost of Pure Insurance) is eligible, NOT the full premium
🧠 What Is NCPI?
🧩 NCPI = Net Cost of Pure Insurance
It represents ONLY the cost of the insurance coverage (mortality charge), NOT:
❌ Cash value
❌ Investment growth
❌ Policy fees
❌ Savings components
It’s the “true” cost of life insurance protection.
👉 You can request your NCPI from the insurance company directly.
💡 Why Only NCPI Is Deductible?
Because tax rules say:
❌ You cannot deduct premiums that contain an investment or savings component
✔ You CAN deduct the cost of pure insurance used to secure a business loan
This prevents people from deducting life insurance premiums as disguised investment expenses.
🧮 Example: Understanding the Deduction
Let’s walk through an easy scenario.
Jeff’s Situation:
- Business loan amount: $200,000
- Face value of life insurance policy: $500,000
- Annual premium: $12,000
- NCPI: $3,200
📌 Step 1 — Calculate Percentage of Policy Used as Collateral
Loan ÷ Policy Face Value
$200,000 ÷ $500,000 = 40%
So only 40% of the policy is securing the loan.
📌 Step 2 — Apply the Percentage to NCPI
Only 40% of the NCPI is deductible:
40% × $3,200 = $1,280
📦 Result
📘 Jeff can deduct $1,280 of NCPI on his tax return — not the full $12,000 premium.
💰 Additional Tax Benefit: Loan Interest Deduction
If the loan is used for business, then:
✔ Loan interest is deductible
✔ Deductible regardless of life insurance
✔ Treated as a business expense
This is separate from NCPI deductions.
🟨 NOTE BOX: Key Exam Concepts 🎯
⭐ Only NCPI is deductible — NEVER the full premium
⭐ Deduction is proportional to amount of policy used as collateral
⭐ Collateral assignment = NO deemed disposition
⭐ Business loan only → not personal loans
⭐ Term insurance NCPI ≈ premium → often fully deductible
⭐ Whole life & UL premiums much higher than NCPI → mostly NOT deductible
🧩 Policy Type & NCPI — What You Need to Know
The type of policy does NOT affect NCPI calculation:
| Policy Type | Can be used as collateral? | Premium equals NCPI? |
|---|---|---|
| Term | ✔ | Almost always (premium ≈ NCPI) |
| Whole Life (par/non-par) | ✔ | No — premium >> NCPI |
| Universal Life | ✔ | No — premium includes investment |
🟦 LLQP TIP:
Term policies provide the largest deductible amount because the premium is almost pure insurance.
🧠 Mini Summary (Perfect for Quick Review)
📌 Collateral Assignment → No tax, no disposition
📌 Only NCPI is deductible — proportionally
📌 Loan must be for business
📌 Bank must require the insurance
📌 Term = most deductible; Whole Life/UL = small deductible portion
🛡️ Exempt vs Non-Exempt Life Insurance Policies — LLQP Beginner’s Ultimate Guide
Understanding exempt vs non-exempt life insurance policies is one of the most important topics in life insurance taxation. It affects how the money inside your policy grows, whether you pay taxes on it, and how to protect your tax-free growth. This guide explains everything a beginner needs to know — simple, step-by-step, with examples and tips for LLQP exam prep. 🎓✨
🔹 What Does “Exempt” vs “Non-Exempt” Mean?
When you buy a permanent life insurance policy (like Universal Life or Whole Life), the government wants to know if you’re using it primarily for insurance protection or as an investment.
- Exempt Policy ✅
- Focused on insurance, not investment
- Cash value growth is tax-free
- Death benefit is fully tax-free
- Non-Exempt Policy ❌
- Considered an investment
- Cash value growth is taxable like any other investment
- Death benefit may still have tax consequences depending on structure
📌 Rule of Thumb: If your policy is mainly for protection, it’s likely exempt. If you put in extra money to grow cash value aggressively, it may be non-exempt.
🏛️ How Policies Are Classified
Policies issued in Canada after December 1, 1982 are tested under exemption rules:
- G2/G3 Policies → Policies acquired after 1982
- Must meet certain rules to remain exempt
- If the rules aren’t met, the policy becomes non-exempt
📌 Older policies (before December 2, 1982) have special grandfathered rules.
🏗️ MTAR Line — The Tax-Free Ceiling
The MTAR line (Maximum Tax Actuarial Reserve) is like an invisible ceiling:
- Ensures your policy stays tax-sheltered
- Limits the cash value growth inside your policy
- Exceeding the MTAR line = policy becomes non-exempt
Key Points About MTAR:
- Based on age, coverage, smoker status, and sex
- Insurance companies test your policy annually
- If you exceed the MTAR line, the entire policy may become taxable
👩💼 Example: Keeping Your Policy Exempt
Jessie, age 30, has a $200,000 Universal Life policy (purchased after 2016).
- Her cash value grows each year
- As long as it stays under the MTAR line, growth is tax-free
- If it exceeds the MTAR line:
- The government treats it like an investment
- You pay taxes on the excess growth
- Once non-exempt, you cannot regain exempt status
🛠️ Ways to Fix a Policy That Exceeds the MTAR Line
Insurance companies give a 60-day grace period to fix issues:
- Increase the coverage amount
- Can increase up to 8% per year
- Raises the MTAR ceiling
- Premiums will increase
- Withdraw excess cash
- Brings the policy back under the MTAR line
- May trigger taxable partial surrender
- Move excess cash into a side fund
- Keeps main policy exempt
- Side fund growth is taxed
💡 LLQP Tip: The side fund solution allows tax-free status for the main policy but doesn’t eliminate tax on the excess money.
🚨 Anti-Dumping Rule (The 250% Rule)
Universal Life policies allow flexible contributions. Some policyholders tried to “dump” large amounts into their policy to avoid taxes.
The Government introduced the Anti-Dumping Rule:
- Applies to policies issued after December 1, 1982
- Measures contributions starting in year 10, looking back 3 years
- You can only add 250% of the cash value from three years ago
Example:
- Year 7 cash value: $50,000
- Max you can add in year 10: $50,000 × 250% = $125,000
- Exceeding this amount risks losing exempt status
📌 This rule prevents abuse and ensures policies are used primarily for insurance.
🧩 Quick Beginner-Friendly Summary
| Concept | Exempt Policy | Non-Exempt Policy |
|---|---|---|
| Focus | Insurance | Investment |
| Cash value growth | Tax-free | Taxable |
| Death benefit | Tax-free | Potentially taxable |
| MTAR line | Must stay below | Not applicable |
| Anti-dumping rule | Apply to UL | Not applicable |
✅ LLQP Key Takeaways
- Always monitor cash value vs MTAR line
- Use coverage increases, withdrawals, or side funds to remain exempt
- Be aware of the anti-dumping rule (250% rule)
- Policies issued before 1982 have different rules
- Universal Life policies are flexible but can easily become non-exempt if rules are ignored
💡 Tip for LLQP Exam: Understanding MTAR and anti-dumping rules is essential for all exempt vs non-exempt policy questions.
📌 Quick Review Box
- Exempt = Tax-free growth ✅
- Non-Exempt = Taxable growth ❌
- MTAR line = Invisible ceiling 🏗️
- Anti-Dumping Rule = Limits big contributions 🚫💰
- Options if exceeding MTAR: Increase coverage, Withdraw cash, Use side fund ⚡
🏢 Corporate Owned Life Insurance & Capital Dividend Account (CDA) — Beginner’s LLQP Guide
For newcomers to LLQP and Canadian life insurance taxation, understanding Corporate Owned Life Insurance (COLI) and the Capital Dividend Account (CDA) is crucial. These are powerful tools for corporate tax planning, succession planning, and shareholder wealth management. This guide explains everything step-by-step in beginner-friendly language, with examples, icons, and notes. 🎓✨
🔹 What is Corporate Owned Life Insurance (COLI)?
Corporate Owned Life Insurance is a life insurance policy purchased and owned by a corporation, rather than an individual.
Key Points:
- The corporation is both the owner and the beneficiary of the policy
- Often used to protect key persons (like founders or executives) or for shareholder succession planning
- Premiums are paid by the company
- Upon the insured’s death, the company receives the death benefit, which can be used strategically
💡 LLQP Tip: Corporate policies are especially useful in private businesses where the death of a shareholder could impact operations or finances.
🔹 What is a Capital Dividend Account (CDA)? 💰
The CDA is a notional or phantom account in a Canadian controlled private corporation (CCPC).
Key Points About CDA:
- Tracks tax-free amounts that can be paid to shareholders
- Includes:
- 50% of tax-free capital gains
- Life insurance proceeds above the Adjusted Cost Base (ACB)
- Not a real bank account — it’s an accounting entry
- Only available to Canadian Controlled Private Corporations (CCPCs)
- Must be private and at least 51% owned by Canadian residents
📌 Important: Public companies or foreign-owned companies cannot use the CDA.
🧮 How the CDA Works with Corporate Life Insurance
When a corporation owns a life insurance policy, the death benefit is split for accounting purposes:
- Adjusted Cost Base (ACB): Total premiums paid by the corporation → returned to the general account
- Excess over ACB: Credited to the CDA → can be paid out to shareholders tax-free
Example:
- Life insurance policy: $200,000
- Premiums paid over 10 years (ACB): $30,000
- Death benefit: $200,000
Calculation:
- $200,000 − $30,000 = $170,000 → credited to CDA
- $30,000 → returned to the company’s general account
✅ This $170,000 can now be distributed as a tax-free capital dividend.
📜 Declaring a Capital Dividend
To distribute the CDA balance:
- Board of Directors Resolution: The board officially declares a capital dividend
- Corporate Lawyer Assistance: Helps draft proper documentation
- Payment to Shareholders: Funds are paid tax-free
💡 LLQP Tip: Proper documentation is crucial. Mistakes can trigger tax consequences.
🔹 Strategic Benefits of CDA
- Tax-Free Distributions: Shareholders receive significant funds without tax
- Succession Planning: Provides liquidity upon death of a key shareholder
- Financial Flexibility: CDA balance can remain until the corporation chooses the right time to distribute
📌 Note: Timing and strategy are important. Distributions should be planned with corporate and tax advisors.
⚠️ Rules to Remember
- Only CCPCs qualify
- Life insurance proceeds must be above the Adjusted Cost Base to enter the CDA
- CDA can include other tax-free amounts like 50% of capital gains
- All distributions must be properly documented and declared
🧩 Quick Beginner-Friendly Summary
| Concept | Key Points |
|---|---|
| COLI | Corporation owns & is beneficiary of life insurance policy |
| CDA | Notional account for tracking tax-free amounts |
| Eligible Amounts | Life insurance proceeds above ACB, 50% capital gains |
| Declaration | Board of Directors must officially declare capital dividend |
| Tax Status | Distributions to shareholders are tax-free |
📌 LLQP Takeaways
- Corporate life insurance can fund a CDA, providing tax-free payouts
- Only CCPCs qualify, with proper legal and accounting processes
- The ACB of premiums is returned to the company, while the excess goes to CDA
- Proper documentation and declaration are essential for compliance
- CDA distributions are a strategic corporate and estate planning tool
💡 Exam Tip: Know the flow: Premiums → ACB → CDA → Capital Dividend → Tax-Free Distribution
🩺 Key Person Disability Insurance — Beginner’s LLQP Guide
Key person disability insurance is an essential tool for Canadian businesses to protect themselves against the financial impact of losing a critical employee due to disability. This section breaks it down in simple, beginner-friendly terms, with examples, icons, and notes to help you fully understand the taxation and practical uses of this type of insurance. 🎓✨
🔹 What is Key Person Disability Insurance? 🤔
Key person disability insurance is a policy that:
- Protects the business if a critical employee (the “key person”) becomes disabled
- Is owned by the company, not the employee
- Pays benefits to the company, not the employee directly
Why is it important?
The company depends on the key person for productivity, sales, or management. If that person is disabled, the business can face:
- Loss of revenue
- Increased costs to replace temporary staff
- Operational disruption
💡 LLQP Tip: Think of this policy as salary replacement for the business, not the individual.
🔹 Who Owns the Policy and Who Benefits?
Ownership and beneficiary designation are crucial for tax purposes. There are two common setups:
- Company-Owned, Company-Beneficiary
- The business pays the premiums
- Premiums are not tax-deductible
- Benefits received by the company are tax-free
- Protects the company from financial loss caused by disability
- Company Pays, Employee-Beneficiary (Taxable Benefit)
- Premiums are added to the employee’s T4 as a taxable benefit
- Employee becomes the beneficiary
- If the employee becomes disabled, the benefits are tax-free
- The company cannot deduct premiums, but the employee gets protection
📌 Key Principle: Tax treatment depends on policy ownership, beneficiary, and reporting on T4.
🔹 Taxation Rules Explained 💵
| Scenario | Who Pays | Beneficiary | Premium Deductible? | Benefit Taxable? |
|---|---|---|---|---|
| 1 | Company | Company | ❌ No | ✅ Tax-Free |
| 2 | Company (reported on T4) | Employee | ❌ No | ✅ Tax-Free |
| 3 | Company (not reported on T4) | Employee | ❌ No | ❌ Taxable |
💡 Note: If the company pays the premium but doesn’t report it on the T4, the government may consider the benefit taxable to the employee. Always ensure proper reporting to maintain tax-free status.
🔹 How the Benefits Work
- Monthly or lump-sum disability benefit is paid to the company or employee based on the policy setup
- Benefits replace lost productivity or salary costs, not personal income
- Helps stabilize the company’s finances during the key person’s absence
📌 Example:
Able Inc purchases a $3,000/month key person disability policy on Tom, a top salesperson.
- Scenario 1: Able Inc is the beneficiary → receives $3,000/month tax-free
- Scenario 2: Premium added to Tom’s T4 → Tom is beneficiary → receives $3,000/month tax-free
- Scenario 3: Premium not on T4 → Tom is beneficiary → benefits could be taxable
🔹 LLQP Takeaways for Beginners
- Ownership matters: Who owns the policy determines who benefits and how it’s taxed
- Beneficiary matters: Benefits are tax-free if the policy is correctly structured
- Reporting matters: Proper T4 reporting is critical in employer-employee setups
- Key person disability insurance protects the business, not the employee
- Premiums are never deductible for tax purposes in company-owned setups
- ❓ Does the Key Person get anything?
- Only indirectly:
- They keep their job because the company survives.
📌 Quick Beginner-Friendly Notes
- Think of the policy as business protection, not employee income
- Tax-free benefit = company receives payout to cover financial loss
- Misreporting premiums can make benefits taxable → always align ownership, beneficiary, and T4 reporting
- Works best for small and medium businesses with key employees
💡 Exam Tip: In LLQP, remember the golden rule:
“If the company pays and is beneficiary → benefit tax-free. If employee is beneficiary → T4 reporting decides tax treatment.”
This guide makes key person disability insurance easy to understand, even if you have zero prior knowledge. It’s all about protecting the business financially while staying compliant with tax rules. ✅
🕰️ Tax Maturity of RRSP — The Ultimate LLQP Beginner Guide (2025)
When studying for the LLQP or learning Canadian tax-preparation, understanding what happens when an RRSP matures is absolutely essential. This complete, beginner-friendly guide explains RRSP maturity rules, RRSP-to-RIF conversions, life annuities, minimum withdrawals, withholding tax, and rollover options — all in simple language with examples and visual-style formatting.
🧠 What Does “RRSP Maturity” Mean?
Every Registered Retirement Savings Plan (RRSP) must eventually reach a maturity date, meaning you can’t keep it as an RRSP forever.
⛔ When MUST your RRSP mature?
- By December 31 of the year you turn 71
- After this date:
- ❌ You can no longer contribute to your RRSP
- ❌ You cannot leave funds sitting inside the RRSP
- You MUST convert it into a retirement income option.
✔️ Acceptable RRSP maturity options:
- Convert to a Registered Retirement Income Fund (RIF)
- Buy a life annuity
- Cash out the full RRSP (not recommended — entire balance becomes taxable!)
👉 You do NOT need to start income immediately!
Income can start the next year, at age 72.
💡 RRSP → RIF Conversion (Most Popular Option)
A Registered Retirement Income Fund (RIF) allows your investments to keep growing tax-sheltered, but you must withdraw a minimum amount every year.
🔹 Key RIF Features
- Investments stay under your control
- You choose what to invest in (GICs, bonds, ETFs, stocks, etc.)
- You must withdraw a government-set minimum % annually
- There is NO maximum withdrawal limit
- Any amount you withdraw above the minimum is subject to withholding tax
📌 Minimum Withdrawal Rates (Example)
| Age | Minimum Withdrawal % |
|---|---|
| 65 | ~4.00% |
| 71 | 5.28% |
| 80 | 6.82% |
| 95 | 20.00% |
💡 Important: These percentages are set by the Government of Canada and can change. Always verify current rates.
🧾 How Withdrawal Tax Works
✔️ Minimum Withdrawal
- Not subject to withholding tax
- But still taxable income on the tax return
✔️ Extra Withdrawals (Above Minimum)
Withholding tax applies:
| Amount Withdrawn (Above Min.) | Withholding Tax |
|---|---|
| Up to $5,000 | 10% |
| $5,001 – $15,000 | 20% |
| Over $15,000 | 30% |
💡 This is NOT your final tax.
Actual tax is based on your marginal tax rate when filing your return.
Example
If you withdraw $5,000 above the minimum, the bank will withhold 10% = $500.
👩❤️👨 Using a Younger Spouse’s Age
To reduce your mandatory annual withdrawal amount, you may elect to base RIF withdrawals on the age of a younger spouse.
Why this helps:
- Withdrawal percentage is lower
- More money stays tax-sheltered
- Your savings last longer
- Beneficial for estate planning
Example:
If you’re 71 (5.28% withdrawal) but spouse is 60 (3.23% withdrawal), using the spouse’s age reduces the required minimum.
🪙 Option 2: Life Annuity
A life annuity purchased using RRSP funds guarantees fixed income for life.
✔️ Advantages
- Guaranteed income
- No investment decisions needed
- Predictable monthly payments
❌ Disadvantages
- Payments do NOT increase with inflation
- When you die:
- If no guarantees were added → no money for beneficiaries
- Irreversible — once purchased, you can’t change your mind
💡 Best for people who want stability and no investment risk.
⚰️ What Happens When You Die? (RRSP/RIF After Death)
RRSP and RIF rules upon death are critical for LLQP.
👩❤️👨 Spousal Rollover — The Most Important Rule
RRSP or RIF can transfer tax-free to your spouse upon death.
✔️ Key points:
- Works regardless of spouse’s age
- Spouse pays tax only when they withdraw funds
- Ideal for minimizing estate taxes
- Protects retirement savings for the family
Example
You die at 71 → spouse is 50
✔️ Entire RRSP/RIF transfers tax-free
✔️ Spouse converts the account and follows rules based on their own age
👶 Rollover to Children (Special Rules)
1️⃣ Child or grandchild under 18
RRIF or RRSP can roll over tax-free to buy a term-certain annuity to age 18.
- Income is taxed at the child’s marginal rate
- Usually beneficial since children have lower tax brackets
2️⃣ Disabled Child (Any Age)
If the child is financially dependent due to mental or physical disability, funds can roll over:
- To purchase a lifetime annuity, OR
- Into the child’s Registered Disability Savings Plan (RDSP)
- Provides long-term tax-deferred growth
- Contribution limits still apply
✔️ This keeps the money tax-sheltered for the child.
⚠️ No Beneficiary? Funds Go to Your Estate
If you have no spouse and no qualifying children:
- RIF/RRSP value goes to the estate
- Entire amount becomes taxable as income
- May push the estate into the highest tax bracket
💀 This is NOT ideal — avoid naming your estate when possible!
📌 Quick Summary (Perfect for LLQP Exams)
| Topic | Key Point |
|---|---|
| RRSP Maturity Age | Must convert by Dec 31 of year you turn 71 |
| Start Withdrawals | Can start in the year you turn 72 |
| Conversion Options | RIF or Life Annuity |
| Tax on RIF Withdrawals | Minimum = taxable but no withholding; Extra = withholding tax |
| Spousal Rollover | Tax-free transfer regardless of spouse’s age |
| Rollover for Minors | Tax-free to annuity until age 18 |
| Disabled Child Rollover | To annuity or RDSP, tax-deferred |
| Estate Transfer | Fully taxable → usually worst option |
💡 LLQP Success Tip
👉 ALWAYS remember:
RRSP must convert by age 71. RIF must start income by age 72. Spousal rollovers avoid huge tax bills.
🌟 Charitable Giving in Life Insurance: A Complete Beginner-Friendly Guide (LLQP)
Charitable giving isn’t just about writing a cheque — it can also be a powerful tax-efficient strategy using life insurance. Many Canadians want to support causes they care about while also receiving tax advantages.
This guide breaks down exactly how charitable giving works, especially in the context of LLQP and life insurance taxation.
❤️ What Is Charitable Giving for Tax Purposes?
Charitable giving refers to donating money, assets, or life insurance benefits to a registered charity.
🧾 How donations help your taxes:
- ✨ First $200 donated → 15% federal tax credit
- ✨ Donations over $200 → 29% federal credit
- ✨ If income is in highest federal tax bracket → 33% credit on donations above $200
- ✨ Provinces also give their own tax credits (varies by province)
- ✨ You can claim up to 75% of your net income in donations per year
- ✨ Unused donations can be carried forward for 5 years
🧰 Special Rule at Death
📌 IMPORTANT Tax Advantage:
When someone passes away, the donation limit increases from 75% → 100% of net income.
This applies to:
- ✔️ The final tax return (terminal return)
- ✔️ The return for the year before death (Carry-back option)
This often allows for very large tax credits that help reduce estate taxes.
🧪 Example: Understanding Donation Limits
➡️ Rohan donates $200,000 in a year
➡️ His net income is $140,000
He can only claim 75% × $140,000 = $105,000 this year.
✨ Remaining $95,000 can be claimed over the next five years.
If he passes away during that period → his remaining donations can be claimed up to 100% of net income on the final return.
💡 Using Life Insurance for Charitable Giving
Many people use life insurance to create a lasting legacy, even when they do not have large cash savings.
Here are the three main strategies.
🛠️ Strategy 1: Assigning (Gifting) a New Life Insurance Policy to a Charity
This is when someone:
- Buys a new permanent life insurance policy
- Transfers ownership to a charity (called absolute assignment)
- Continues paying the premiums
✔️ What Happens Financially?
| Item | Who Gets It | Tax Benefit |
|---|---|---|
| Policy ownership | Charity | N/A |
| Death benefit (e.g., $500,000) | Charity | ❌ No tax receipt at death |
| Premiums paid (e.g., $12,000/year) | Charity | ✔️ Donor gets tax receipts annually |
🧾 Annual premiums = charitable donations, so the donor receives a tax credit every year.
⭐ Why Use Permanent Insurance?
Permanent insurance guarantees the charity will eventually receive funds.
Term insurance often expires (e.g., age 75), so the charity may end up with nothing.
🔍 Example
Rohan buys:
- Permanent policy worth $500,000
- Annual premium: $12,000
- He assigns the policy to a charity
📌 Tax Effect:
Rohan receives a $12,000 donation receipt every year.
The charity receives the $500,000 when he passes away — but no additional tax receipt is issued since the donation was already recognized through premiums.
🛠️ Strategy 2: Donating an Existing Life Insurance Policy
This is when someone already owns a policy with cash value and transfers it to a charity.
✔️ What Happens?
- Charity becomes full owner
- Charity gets access to the cash value (e.g., $50,000)
- Donor may continue paying premiums (and gets receipts)
🧾 Tax Receipts Donor Receives:
- 🎁 One-time tax receipt for the policy’s cash value
- 🧾 Annual receipts for ongoing premiums
🔍 Example
- Policy cash value = $50,000
- Total premiums paid = $12,000
- ACB (Adjusted Cost Base) = $10,000
🧮 Policy Gain
Fair Market Value (FMV) - ACB = Taxable Policy Gain
$50,000 - $10,000 = $40,000 gain
This gain is taxable—but…
🎉 Donor receives a $50,000 charitable donation receipt, which usually offsets the taxable gain entirely.
✔️ Key Note:
📌 The charity does NOT receive the death benefit at the moment of transfer.
The charity only gets the death benefit when the donor dies..
Since they now own the policy, the donor no longer owns the death benefit.
🛠️ Strategy 3: Naming a Charity as the Policy Beneficiary
This is the simplest method.
✔️ How it works:
- Donor keeps ownership of the policy
- Charities are named as beneficiaries
- Donor receives no tax credits during lifetime
- Upon death, charity receives the death benefit
- The charity gives a donation receipt to the estate
🧾 Tax Benefits at Death
- The estate receives a tax receipt equal to the death benefit
- Can be applied:
- To the final tax return
- Carried back one year
This often results in large tax refunds for the estate.
🔍 Example
- Policy death benefit = $500,000
- Premium $12,000/year (no tax credits during life)
- Charity receives $500,000 at death
- Estate receives a $500,000 donation receipt
Tax credit can reduce:
- Capital gains
- RRSP/RRIF taxes
- Other estate taxation
Big win for both the estate and the charity.
🔒 Key Differences Between the Three Methods
| Feature | Assign New Policy | Donate Existing Policy | Name Charity as Beneficiary |
|---|---|---|---|
| Ownership | Charity | Charity | Remains with donor |
| Premium receipts | ✔️ Yes | ✔️ Yes | ❌ No |
| Receipt for cash value | ❌ No | ✔️ Yes | ❌ No |
| Receipt for death benefit | ❌ No | ❌ No | ✔️ Yes (estate receives) |
| Immediate tax benefit | ✔️ Yes | ✔️ Yes | ❌ No |
| Benefit to charity | Death benefit | Cash value(now) + Death benefit | Death benefit |
📘 PRO TIP BOX
🧠 Charitable giving through life insurance is one of the most tax-efficient strategies in estate planning.
Even modest annual premiums can create a large charitable legacy.
📝 Final Summary for LLQP Exams
✔️ Donations give federal + provincial tax credits
✔️ Claim limit = 75% of net income (100% at death)
✔️ Unused donations carried forward 5 years
✔️ Life insurance charity strategies:
- Assign new policy → donor gets receipts for premiums
- Donate existing policy → donor gets receipt for cash value + premiums
- Name charity as beneficiary → estate gets receipt at death
✔️ Donating a policy may create a policy gain, but donation receipts usually offset it
✔️ Term insurance is rarely recommended for charitable purposes
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