Payout from Life Insurance-taxability for company
Is payout from life insurance taxable income of company? QUESTION: A company owns a life insurance policy on a shareholder-employee who was recently killed in an accident. The company took out the life insurance policy within the past year and has now received a payout under the policy because of the shareholder-employee’s death. Is the payout under the life insurance policy taxable income for the company? ANSWER: Whether a payout under a life insurance policy is taxable income and the premiums paid on that policy are deductible will depend on the company’s purpose in taking out the policy. If the company has taken out the policy to guard against a loss of profitability or income because of the shareholder-employee’s death, the payout will be taxable income and the premiums will be deductible. If the company has taken out the policy for a capital purpose (eg to pay out a shareholder current account on death of the shareholder or to allow for the purchase of shares from the estate of the deceased shareholder), the payout will not be taxable and the premium will be non-deductible. References: Income Tax Act 2007, ss CB 1, DA 1, DA 2.
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