How proposed capital gains tax changes could have impacted your life insurance
The proposed increase to the capital gains tax in Canada has been cancelled. Here is information on what could have come of the tax hike.
Jordan Lavin
The article was originally published on August 6, 2024, and was updated on March 2, 2026.
Update: On January 31, 2025, the Government of Canada announced a deferral in the capital gains inclusion rate from June 25, 2024, to January 1, 2026. On March 21, 2025, the government announced it would cancel the proposed rate increase.
A possible big tax hike was considered for Canadians, and believe it or not, it would have implications for your life insurance policy. The proposed changes to the way capital gains are taxed could mean you no longer have enough insurance coverage, especially if you own a large asset like a family cottage.
What are the proposed changes, and what do they have to do with insurance? Keep reading to find out.
Key takeaways on capital gains tax changes & your life insurance
- Announced cancellation: The rate increase was originally postponed to January 1, 2026, but it was officially cancelled on March 21, 2025.
- Capital gains tax increase: As of June 25th, 2024, Canada's capital gains tax increased to 50% on the first $250,000 and 66.67% on amounts over $250,000.2.
- Impact on life Insurance: Higher estate taxes due to new rules may require more life insurance to cover assets like a family cottage. Be sure to review your policy to ensure the coverage is enough.
- Investing with permanent life insurance: Earnings on cash value withdrawals are taxed as income, not capital gains. You can consider taking out loans against your policy for tax advantages.
What does the capital gains hike cancellation mean for you?
On March 21, 2025, a statement on the Prime Minister of Canada’s website announced that the proposed capital gains tax hike is cancelled. This means all capital gains will be subject only to the existing 50% inclusion rate.
In addition to the cancellation, the government announced it will maintain the increase in the Lifetime Capital Gains Exemption limit at $1,250,000 and will introduce legislation regarding the increase in time. However, it did not mention the previously proposed Canadian Entrepreneurs’ Incentive, leaving the future of this incentive uncertain.
For more details, read the official announcement.
What are the 2024 capital gains tax changes in Canada?
When you make money from selling property like real estate or investments, it’s not taxed as income but rather as something called a capital gain.
While the tax rates for capital gains are the same as the tax rates for other income, the rule up until now has been that only 50% of capital gains are subject to taxation. For example, if you had $100,000 in capital gains in a tax year, you would only pay tax on $50,000 of that income.
As of June 25th, 2024, that rule was supposed to change. The proposal would have made it so that when you have a capital gain, you would pay tax on 50% of the first $250,000, and 66.67% (two-thirds) on any amount over $250,000.
Take, for example, a capital gain of $500,000. Under the old rule, income tax would be due on 50% of that, or $250,000. Under the new rule, income tax is due on 50% of the first $250,000 and 66.67% on the remainder for a total of $291,675. That works out to about $22,000 in extra taxes for the same amount of income for a resident of Ontario.
Our calculations were made using a capital gains tax calculator. For more insight on how the changes may impact your specific case, be sure to use it for your own calculations.
How would this change have impacted life insurance?
The thing about capital gains tax is that you don’t actually have to earn income to trigger a capital gain. All you need is a “deemed disposition,” which is the Canada Revenue Agency’s (CRA) way of saying “you can’t avoid taxes by never selling something.”
There are many ways to trigger a capital gain through deemed disposition, and dying is one of them. Your estate will be expected to pay income tax on the capital gain that would have been made had those investments been sold. This can be a big problem for assets like vacation properties, which can’t be both sold and bequeathed.
Fortunately, for those wealthy enough to have these problems, life insurance can help. People figured out that you can name your estate as the beneficiary of your life insurance policy, have the benefit paid out tax-free, and use it to pay the capital gains tax on any deemed disposition.
Your life insurance policy may no longer be enough to cover your estate’s taxes
If you’re among those who have life insurance in place to pay your estate’s capital gains tax on your death, the proposed changes could have meant you no longer have enough coverage.
Consider, for example, a family cottage. While vacation homes were once affordable for the middle class, property values have skyrocketed and can easily be worth more than a principal residence.
Imagine a cottage bought for $500,000 that’s currently estimated to be worth $2.5 million. Under the old rules, 50% of that gain would be taxable and the estate would be charged roughly $535,000 in capital gains tax. Under the new rules, 64.6% of the gain is taxable and the estate will be charged closer to $691,000 in capital gains tax – an increase of about $156,000.
If you have a large asset like this and bought life insurance, assuming the capital gain would be taxed at 50%, you may no longer have enough coverage. If you are concerned at all about your coverage amount, estate plan or tax implications of your life insurance policy, it’s best to speak with your financial advisor or insurance broker..
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No changes to tax on cash value withdrawals from life insurance
Another way life insurance can save taxes is by holding investments in the policy itself. Known as a “permanent” or, more specifically, “universal” life insurance, this type of coverage lets you pay more than the cost of your insurance premium and invests the extra cash. And because there are no taxes on life insurance distributions, the whole problem of capital gains tax goes away.
A key benefit of universal life insurance is that you don’t have to die to get that extra money back out of your policy. Known as a “pre-death distribution,” or “surrender,” this action takes money out of your life insurance policy and puts it back in your pocket.
If you’re among those using a universal life insurance policy to invest, you’ll be happy to know there were no proposed changes in the way cash value withdrawals are taxed. The bad news is that cash value withdrawals from life insurance are always taxed as other income, not capital gains. That means you’ll pay tax on 100% of the gain from your investments – a higher overall tax bill than if the withdrawal were taxed as a capital gain.
An alternative to withdrawing cash value from your life insurance policy is to take a personal loan using your life policy as collateral. You may be able to borrow between 75 to 90% of the cash surrender value of your policy as an alternative to cashing out your life insurance. Your financial advisor or insurance broker can help you understand your options.
The bottom line
The proposed changes to capital gains tax rates in Canada would not have directly affected your life insurance policy, but higher taxes on your estate could have required more life insurance coverage than you currently carry to ensure your estate plan was still able to fulfill your goals . It is always recommended to regularly consult with your financial advisor or estate lawyer to keep up with the impact of regulatory changes and to seek guidance on any financial consideration, such as how capital gains taxes could affect your estate and whether you still have enough life insurance coverage to protect your assets.