Background
Saeed Akhavan purchased a 20-year term life insurance policy from Manulife in 2003. When the policy matured in 2023, Manulife paid him $10,529.20—the total of all monthly premiums he had paid over the term. Manulife issued a T5 slip reporting this as $10,529.20 in investment income. Akhavan did not receive the T5 and did not report the income on his 2023 tax return.
The Minister of National Revenue reassessed Akhavan to include the $10,529.20 as taxable income. Akhavan appealed, arguing that since he received only the premiums he had paid, there should be no taxable gain. He appeared self-represented before Justice David E. Graham at the Tax Court of Canada in Vancouver on July 10, 2026.
The Court’s Holding
Justice Graham dismissed the appeal. The court held that under paragraph 56(1)(j) and subsection 148(1) of the Income Tax Act, a taxpayer must include the proceeds of disposition of a life insurance policy less the adjusted cost basis. Subsection 148(9) deems the policy disposed of when it matures.
Although Akhavan’s proceeds ($10,529.20) equaled his premiums paid, the adjusted cost basis must be reduced by the “net cost of pure insurance”—the economic cost of the insurance coverage provided over the 20-year term, as defined in the Income Tax Regulations. The court found that Akhavan bore the burden of proving the net cost of pure insurance was nil, and he failed to meet that burden. The court noted that it is “simply impossible that the insurance component cost nothing” and that the best evidence of the adjusted cost basis was Manulife’s T5 reporting the $10,529.20 as investment income.
While the court found Akhavan credible and sympathized with his confusion, his belief that the return of premiums should not be taxable did not constitute proof of the factual basis for his claim. The court declined to shift the burden to the Crown despite the absence of explicit assumptions regarding the net cost of pure insurance in the Reply, citing the Federal Court of Appeal’s decision in Eisbrenner v. The Queen.
Key Takeaways
- Returns of premiums on life insurance policies are generally taxable as investment income; the return of all premiums paid does not result in a tax-free recovery if the policy included insurance protection.
- The adjusted cost basis of a life insurance policy is reduced by the “net cost of pure insurance”—a real economic cost derived from actuarial mortality assumptions and insurance risk borne by the policyholder.
- Taxpayers bear the burden of affirmatively proving material facts supporting their claimed tax treatment; omission of such facts from a notice of appeal does not shift the burden to the Crown.
- Insurance companies should provide clearer disclosure about the tax consequences of premium-return arrangements, though absence of such disclosure does not excuse the taxpayer’s reporting obligation.
Why It Matters
This decision clarifies a common misunderstanding among taxpayers: that the return of all premiums paid on a life insurance policy necessarily means no taxable income arises. The court’s holding reaffirms that life insurance is purchased for valuable protection, and the cost of that protection—measured by the net cost of pure insurance—is embedded in the premium structure. Even when a policy includes a maturity benefit equal to total premiums, the insurance cost is deducted from the adjusted cost basis, resulting in taxable income on maturity.
The decision also reinforces procedural principles critical to tax litigation: that taxpayers must plead and prove the facts necessary to support their tax position, and that the absence of assumptions in the Minister’s Reply does not automatically place the burden on the Crown. This has implications for all taxpayers pursuing tax appeals and underscores the importance of assembling documentary evidence—ideally calculations from the insurance provider—before disputing a reassessment.