Can CRA Seize Life Insurance Proceeds to Pay Deceased’s Tax Liability?

Can CRA Seize Life Insurance Proceeds to Pay Deceased’s Tax Liability?

The CRA (Canada Revenue Agency) is given some powers under the Income Tax Act to satisfy the tax debts of an individual out of property that they transferred to a non-arm’s length individual, for example, sibling, child, or spouse. Under these rules, the property’s recipient is severally and jointly liable with the deceased for the tax debts. While this liability rule has been challenged a lot of times, the CRA has never stopped applying it through a range of court cases over the years.

But when it comes to life insurance proceeds, the concern has been quite serious. Can CRA seize life insurance proceeds to pay the deceased’s tax liability? Our tax consultant in Edmonton says no. Fortunately, CRA can’t confiscate the life insurance proceeds to satisfy the tax debt of a deceased. Here’s why:

  • The Income Tax Act talks about the transfer of property to a non-arm’s length individual. But proceeds of life insurance aren’t transferred to a beneficiary like; for instance, RRSP/RRIF is transferred to a beneficiary. In the case of insurance proceeds, the payment isn’t made from the deceased but from the insurance company. This includes funds that the deceased wouldn’t have access to if he wasn’t dead.
  • The rules in the Income Tax Act aim to preserve the estate of the deceased so that taxes may be gathered from that estate when they’re not alive. However, the proceeds will bypass the estate if a beneficiary is named. a tax planning consultant doing some calculations
  • According to the previous Tax Court decisions, life insurance proceeds aren’t subject to the same rules applied in cases like Dreger.

In conclusion, it’s important to differentiate between insurance proceeds paid to the estate versus those paid to a named beneficiary. If a policy’s beneficiary is the estate, the proceeds will be vulnerable to every creditor, including the CRA. This is why it’s important to designate a particular beneficiary on a policy (when possible).

Faber LLP’s tax consultant in Edmonton can help you navigate complex regulations, reduce tax burdens, and meet regulatory obligations

Faber LLP’s partner-led practice draws on specialized industry knowledge, global resources, and deep experience to offer clients the best business tax advisory services in Canada.

Driven by a hands-on, tailored service approach, Faber LLP is a tax consultancy firm in Edmonton that minimizes liabilities and helps you succeed in your most significant endeavours.

Contact them directly for more information!

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