Is critical illness insurance taxable in Canada in 2024?

Navigating the complexities of insurance can be daunting, especially regarding critical illness coverage in Canada. Apart from eligibility, coverage, and premiums, an important question most of us have is, "Is critical illness insurance taxable?" We have you covered.

Whether you're an individual seeking clarity or a business exploring your options, we've simplified the landscape of critical illness insurance, providing insight into its tax implications in Canada just for you in this guide.

You can also use our free comparator to compare plans and get free personalized quotes to get an exact figure on your critical illness insurance policy.

Are critical illness insurance premiums tax deductible?

No, critical illness insurance premiums are not tax-deductible in Canada for individuals. This is because the Canada Revenue Agency (CRA) considers them personal living expenses, just like life and disability insurance premiums. These expenses are paid with after-tax dollars, so they are not eligible for tax deductions.

Here are some details:

• Personal Expense: The CRA defines personal expenses as costs incurred for personal benefit or enjoyment. Since critical illness insurance is designed to protect your financial well-being in the event of a critical illness, it is considered a personal expense.
• After-Tax Dollars: Premiums are paid with money you have already paid taxes on. Therefore, claiming deductions for them would essentially be double-counting the tax benefit.

There are some exceptions to this rule though:

• Employer-Paid Premiums: If your employer pays for your critical illness insurance premiums, the amount may be considered a taxable benefit. This means you will need to pay taxes on the value of the premiums.
• Self-Employed Individuals: Self-employed individuals may be able to deduct a portion of their critical illness insurance premiums as a business expense. However, this is a complex tax issue and it is best to consult with an accountant for specific advice.

You can get in touch with an advisor by comparing plans from multiple companies using our free comparator below. Get personalized quotes and appropriate advice in no time.

Is the return of premium benefit taxable?

In Canada, the taxability of the return of premium benefit for critical illness insurance depends on several factors, such as:

Type of policy

• Return of premium on death (ROP): Generally not taxable.
• Return of premium on expiry: The tax treatment is uncertain and may be subject to change. The Canada Revenue Agency (CRA) has not issued clear guidance on this specifically for critical illness insurance and interpretations vary.
• Return of premium on surrender: If the policy is surrendered within 10 years of purchase and the total premiums paid exceed $5,000, the return of premium may be considered taxable income.

Some experts suggest that the return of premium on expiry might be taxed as a capital gain, while others believe it could be considered a return of capital and exempt.

Amount of premium returned

• If the total premiums paid exceed the death benefit, the excess amount of the return of premium may be taxable as income.

Reason for receiving the return

• If the return of premium is received due to a change in the policy terms or conditions initiated by the insurance company, it may be considered a return of capital and not taxable.

You can consult a tax professional to determine the specific tax implications of your situation. They can analyze your policy and provide personalized advice based on the latest rulings and interpretations.

Is critical illness insurance worth it?

Whether or not critical illness insurance is worth it depends on your circumstances and financial goals. Here are some of its pros and cons to help you make an informed decision: 

Pros

• Financial protection: Provides a lump sum payment upon diagnosis of a covered critical illness, helping cover medical expenses, debt payments, and living costs.
• Complements existing health insurance: Covers specific critical illnesses that might not be fully covered by your regular health plan.
• Affordability: Premiums are generally lower than disability insurance premiums, especially for young and healthy individuals.
• Tax-free benefit: The payout from critical illness insurance is typically tax-free in many countries, including Canada.

Cons

• Limited coverage: Only covers specific critical illnesses listed in the policy, not all illnesses or injuries.
• Pre-existing conditions: May have exclusions for pre-existing conditions, meaning you might not be eligible for coverage if you already have a serious illness.
• Cost: Premiums can increase significantly with age and health status, making it less affordable in the long run.
• May not be necessary: If you have significant savings or other financial resources, you might be able to self-insure for critical illness.

Also, there are other types of insurance, such as disability insurance or long-term care insurance, that might be more suitable depending on your needs. Make sure to compare plans before buying any policy.

How much critical illness insurance should you get?

An important part of critical illness insurance is understanding how much critical illness coverage you need. General guidelines suggest aiming for coverage between 5 and 10 times your annual income. However, individual needs can vary significantly. 

You can determine the coverage amount using our critical illness insurance calculator. To get the ideal amount of critical illness insurance in Canada, keep these factors in mind:

1. Your current income: Aim to cover enough to maintain your desired lifestyle during treatment and recovery. Calculate your monthly expenses and consider potential income loss due to illness.
2. Existing financial resources: Assess your savings, investments, and other financial resources available to cover healthcare costs and living expenses.
3. Family situation: If you have dependents, ensure the coverage amount is sufficient to support their needs during your illness.
4. Debts and financial obligations: Calculate your outstanding debts (mortgage, loans, etc.) and include coverage to help manage repayments during illness.
5. Future medical expenses: Consider potential costs associated with specialized treatments, rehabilitation, and long-term care needs.

It's recommended to get personalized quotes from multiple providers to get the best idea of the critical insurance coverage you need. You can do it using our free comparator below. Compare plans and get quotes in no time by clicking the button below.

Is critical illness insurance taxable for corporations?

Unfortunately, the tax treatment of critical illness insurance payouts received by corporations in Canada is not straightforward and depends on various factors.

Here's the breakdown:

• Generally, the payout won't be tax-free if the corporation owns the policy and pays the premiums.
• In this case, the payout would be considered taxable income and subject to corporate income tax.
• The corporation would need to report the full amount received as income and pay taxes on it.

However, there are some exceptions where the payout might be tax-free:

• Key person insurance: If the policy covers a key employee's critical illness and the corporation can demonstrate the loss of the employee would have a significant negative impact on its operations, the payout could be treated as a capital gain and be partially or fully tax-free.
• Employee death benefit: If the policy is structured as a death benefit and the employee dies from a critical illness covered by the policy, the corporation may be able to deduct the premiums paid and receive the payout tax-free.

Tax laws and interpretations are subject to change. Therefore, consulting with a tax professional is essential to determine the specific tax implications of receiving a critical illness insurance payout in your corporation's case. 

It's equally important to shop around and compare plans from different vendors to save money and get the most comprehensive coverage.

You can use our comparator to get personalized critical illness insurance quotes from leading Canadian providers — just fill in some basic details and get quotes instantly.

Did you like this article?

Sunny Yadav Copywriter

Sunny has over six years of experience curating engaging content spanning across industries. Specifically in finance, his expertise is insurance reviews and lending and investment topics.