Are Insurance Dividends Taxable?

Are Insurance Dividends Taxable?

• A. Yes
• B. No
• C. Taxable only if cashed within a year
• D. Taxable only if they exceed premiums paid

Answer: (A)

Insurance dividends come from participating life insurance and aren’t simply a pure return of income. In Canada, the dividends themselves are generally not taxed as ordinary income when you receive them, especially if they reduce premiums or are taken as a cash dividend that represents a return of the premiums you’ve paid. But there is a tax nuance: if you leave dividends with the insurer to accumulate and earn interest, the interest that accrues on that accumulated amount is taxable to you. So there is a tax consequence connected to insurance dividends in certain situations, which is why the concept isn’t completely tax-free in all cases. This is why the statement that insurance dividends can be taxable is the best answer: there are circumstances under which tax applies, even though the dividends themselves may often be received tax-free.

Insurance dividends come from participating life insurance and aren’t simply a pure return of income. In Canada, the dividends themselves are generally not taxed as ordinary income when you receive them, especially if they reduce premiums or are taken as a cash dividend that represents a return of the premiums you’ve paid. But there is a tax nuance: if you leave dividends with the insurer to accumulate and earn interest, the interest that accrues on that accumulated amount is taxable to you. So there is a tax consequence connected to insurance dividends in certain situations, which is why the concept isn’t completely tax-free in all cases. This is why the statement that insurance dividends can be taxable is the best answer: there are circumstances under which tax applies, even though the dividends themselves may often be received tax-free.