A recent Tax Court of Canada decision has confirmed what many policyholders may not realize: when a return-of-premium life insurance policy matures and pays back the premiums you contributed over its term, that payout is taxable investment income. The ruling in Akhavan v. The King, 2026 TCC 135, dismissed a taxpayer's appeal of a reassessment that added $10,529.20 to his income for the 2023 tax year, representing the full amount of premiums returned to him when his 20-year term life insurance policy matured.
The taxpayer had purchased a Manulife term life insurance policy in 2003. Under the policy's terms, upon maturity in 2023, Manulife returned all the monthly premiums the taxpayer had paid over the policy's two-decade term. Manulife issued a T5 slip reporting this amount as investment income. The taxpayer, who did not receive the T5 slip, did not include this amount in his 2023 tax return. The Minister of National Revenue subsequently reassessed his return to include the $10,529.20, and the taxpayer appealed.
The court's analysis turned on the Income Tax Act's treatment of life insurance policy dispositions. Under subsection 148(1) of the Income Tax Act, when a taxpayer disposes of an interest in a life insurance policy, the income inclusion equals the proceeds of disposition minus the policy's adjusted cost basis. Subsection 148(9) deems a policy to have been disposed of when it matures. The critical question was therefore what adjusted cost basis applied to the taxpayer's policy.
The adjusted cost basis formula includes a deduction for the "net cost of pure insurance" over the policy's life. The taxpayer argued that his net cost of pure insurance was nil, which would have resulted in an adjusted cost basis equal to the $10,529.20 he received, producing no taxable income. The court rejected this position. Judge David E. Graham noted that the taxpayer had paid Manulife $10,529.20 over 20 years for life insurance coverage, not merely for the privilege of getting his money back two decades later. While the policy included the right to a return of premiums at maturity, the insurance component of the transaction necessarily cost something. The taxpayer's belief that the return of premiums should not be taxable did not amount to proof that his net cost of pure insurance was nil, and he failed to establish that fact on a balance of probabilities.
The court acknowledged that the Manulife policy did not clarify the taxable nature of the return of premiums. It accepted that it would have been helpful if the policy had included calculations of the adjusted cost basis, including the net cost of pure insurance. In the absence of such documentation, the court found that the best evidence of the taxable amount was Manulife's issuance of a T5 slip indicating investment income of $10,529.20.
For business owners who use life insurance as part of their personal or corporate financial planning, this decision serves as a reminder that the tax treatment of insurance products can be more complex than initial marketing materials suggest. Return-of-premium policies are often positioned as offering "free" insurance coverage because the policyholder eventually receives back all the premiums paid. The reality, as this case demonstrates, is that the returned premiums are treated as proceeds of disposition under the Income Tax Act, and unless the adjusted cost basis equals or exceeds that amount, the payout generates taxable income.
The decision also highlights the importance of understanding what documentation insurers will issue when a policy matures. In this case, the taxpayer did not receive the T5 slip Manulife issued, which contributed to his failure to report the income. Business owners should ensure their contact information with insurers remains current and should inquire about expected tax slips when policies approach maturity or other disposition events. Relying on not receiving a slip is not a defence to a reassessment when the insurer has in fact issued one.
This ruling does not change the law governing the taxation of life insurance dispositions. It applies established provisions of the Income Tax Act to a straightforward set of facts. But it does illustrate how easily a policyholder can misunderstand the tax consequences of an insurance product purchased years or decades earlier. When a return-of-premium policy matures, the policyholder may feel they are simply getting their own money back. The Income Tax Act, however, treats that payment as a disposition of the policy, and unless the adjusted cost basis eliminates the gain, the proceeds are taxable.
Business owners considering life insurance products, whether for personal protection, key-person coverage, or as part of a buy-sell arrangement, should ensure they understand the tax treatment at every stage of the policy's life cycle, including maturity or early surrender. Consulting with a tax professional before purchasing a policy and again before a policy matures can help avoid the surprise this taxpayer experienced when a $10,529.20 payment he believed was tax-free turned out to be fully taxable income.