Judge rejects taxpayer’s claim that net cost of pure insurance is nil for purpose of calculations
Canada’s Tax Court has dismissed a taxpayer’s appeal against the minister of national revenue’s reassessment based on a finding that the income should have included investment income of $10,529.20 from the return of life insurance premiums.
The taxpayer – the appellant in Akhavan v. The King, 2026 TCC 135 – bought a Manulife term life insurance policy in 2003.
Upon maturity in 2023, in line with the policy terms, Manulife paid the taxpayer $10,529.20, representing the total of all monthly premiums he had paid over the policy’s 20-year term.
Manulife issued the taxpayer a T5 referring to his investment income of $10,529.20. As the taxpayer did not receive the T5 slip, he did not report that income in his 2023 tax return. The taxpayer then appealed from the minister’s eventual reassessment.
Tax Court denies appeal
In dismissing the taxpayer’s appeal, the court cited the following provisions of the Income Tax Act, 1985:
- s. 148(1), which required taxpayer income to include an amount equal to the proceeds of the disposition received from the disposition of their interest in a life insurance policy, minus the policy’s adjusted cost basis
- s. 148(9), which considered a taxpayer to have disposed of a life insurance policy when the policy matured
Net cost of pure insurance
The court addressed the question of what the policy’s adjusted cost basis should be in the taxpayer’s case. In the adjusted cost basis formula, the court noted that paragraph (a) of item “L” reduced the adjusted cost basis by the “net cost of pure insurance.”
The court recognized that the taxpayer was asserting the material fact that the net cost of pure insurance was nil.
“The only way that the $10,529.20 in proceeds that he received could be tax-free would be if his adjusted cost basis was $10,529.20,” wrote Judge David E. Graham. “In the circumstances, the only way that his adjusted cost basis could be $10,529.20 would be if his net cost of pure insurance was nil.”
The court added that 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.
Ultimately, the court held that the taxpayer failed to establish, on a balance of probabilities, the material fact that the net cost of pure insurance was nil.
The court did not find this failure surprising, given that the taxpayer had paid Manulife $10,529.20 in total for life insurance, not for the mere privilege of getting back his own money in two decades.
The court acknowledged that the taxpayer’s purchase must have included, as a small component, the right to the return of his premiums at maturity. However, the court stressed that the insurance component of this transaction had to cost something.
Without a factual assumption to the contrary, the court pointed out that the taxpayer’s failure to plead explicitly that his net cost of pure insurance was nil did not mean that the respondent had to prove that the net cost of pure insurance was at least $10,529.20.
About Manulife policy
The Tax Court of Canada noted that the Manulife policy did not clarify the taxable nature of the return of premiums. The court accepted that it would have been helpful if the Manulife policy included calculations of the adjusted cost basis, including the net cost of pure insurance.
Without such calculations, the court found that the best evidence of those figures was Manulife’s issuance of a T5 indicating that the taxpayer had investment income of $10,529.20.
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