Borrowing Against Whole Life: Canadian Tax Rules

Here's a rule that surprises a lot of policyholders: under Canada's Income Tax Act, a policy loan from your own whole life policy counts as a disposition of part of your interest in that policy. That's the same word the Act uses for surrendering the policy. It's spelled out in the definition of "disposition" in subsection 148(9) of the Income Tax Act, which lists "a policy loan made after March 31, 1978" right after "a surrender thereof."

That doesn't mean every policy loan is taxed. Often it isn't. But it does mean the tax side of borrowing against cash value life insurance works differently from borrowing against your house or your investments. If you own a participating or whole life policy, or you're thinking about buying one, here's how the rules actually read.

What cash value actually is

The Financial Consumer Agency of Canada puts it simply: "Permanent life insurance policies usually build up a cash value. This means you get a cash value back if you cancel your policy." The same page notes that you "may be able to take out a policy loan or use your life insurance policy as collateral for a loan," and that whole life policies often come with a guaranteed minimum cash value.

So there are really three ways to get money out of a policy while you're alive:

• Surrender it. You cancel the coverage and the insurer pays you the cash surrender value.
• Take a policy loan. The insurer advances money to you under the policy's terms, and the coverage stays in force.
• Use it as collateral. You borrow from a bank or other lender and assign the policy as security.

Each one is treated differently for tax. Let's go through them.

The key number: adjusted cost basis (ACB)

Everything hinges on your policy's adjusted cost basis, or ACB. The Income Tax Act defines it in subsection 148(9) with a long formula. In plain terms, premiums you've paid push the ACB up, and for most policies acquired after December 1, 1982, the "net cost of pure insurance" (the insurer's calculation of what the death protection itself cost each year) pulls it down.

That second piece is why ACB often rises in the early years of a whole life policy and then falls over time. In later years, it's common for the cash value to sit well above the ACB. Your insurer calculates the ACB, so you don't have to do the math yourself, but it's worth asking for the number.

Surrendering the policy

When you dispose of an interest in a life insurance policy, subsection 148(1) includes in your income the amount by which the proceeds "exceeds the adjusted cost basis to the policyholder of that interest immediately before the disposition."

So if you surrender a policy and the cash surrender value is higher than your ACB, the difference is taxable income in that year. It's taxed as income, not as a capital gain. If the cash value is at or below the ACB, there's generally nothing to include.

The CRA's older interpretation bulletin IT-87R2, Policyholders' Income from Life Insurance Policies adds a practical point: insurers are required to report the taxable amount to you on an information slip (a T4A or T5). Keep in mind that bulletin is dated February 15, 1996, and the CRA has archived it and says it won't be updated, so read it as background, not current guidance.

Taking a policy loan

Because a policy loan is a disposition, the same comparison applies. Roughly speaking, if the loan is within your ACB, there's no income inclusion. If the loan pushes past the ACB, the excess is taxable income in the year you borrow.

A few points from the Act are worth knowing:

• "Policy loan" has a specific meaning. Subsection 148(9) defines it as "an amount advanced by an insurer to a policyholder in accordance with the terms and conditions of the life insurance policy." A loan from your bank isn't a policy loan.
• Repaying can give you a deduction. Under paragraph 60(s) of the Income Tax Act, if part of a policy loan was taxed and you later repay it, you can deduct repayments up to the amount previously included in income (less anything you've already deducted). In effect, you don't pay tax twice on the same dollars.
• Interest can count as premium. The Act's definition of "premium" includes interest paid to a life insurer on a policy loan, other than interest that's deductible under paragraphs 20(1)(c) or 20(1)(d). That interest can feed back into your ACB.
• Newer policies have extra rules. For policies issued after 2016, the Act has specific provisions on how policy loans interact with partial surrenders and ACB.

Using the policy as collateral instead

This is the contrast many people miss. The same definition of "disposition" in subsection 148(9) says it does not include "an assignment of all or any part of an interest in the policy for the purpose of securing a debt or a loan other than a policy loan."

So assigning your policy to a lender as collateral is not, by itself, a disposition under section 148. That's a big reason some people choose a collateral loan over a policy loan. It isn't automatically better, though. A third party lender will set its own interest rate, lending limits and repayment terms, and those can change.

What happens when you die

The FCAC notes that the death benefit is generally tax free. But an outstanding policy loan is usually deducted from what your beneficiaries receive. So a loan that never caused a tax bill can still shrink the money your family gets. If you're borrowing against a policy that's meant to protect a spouse or kids in Burnaby or New Westminster, run the numbers on what's left for them.

What this doesn't tell you

This is where honesty matters more than a tidy answer:

• The legislation is genuinely complex. The ACB formula alone has more than a dozen components. The summary above is simplified, and edge cases (policies acquired before December 2, 1982, policies issued after 2016, annuity contracts, segregated fund policies) can work differently.
• The CRA's main plain-language bulletin is old. IT-87R2 is from 1996 and archived. The Act itself is current (the Justice Laws site shows section 148 current to September 21, 2026), but reading legislation isn't the same as knowing how the CRA applies it in a given case.
• Your ACB is policy-specific. Two people with the same cash value can face very different tax results depending on their ACB.
• Interest deductibility depends on use. Whether interest on any loan is deductible depends on what you use the money for, and that's a question for a tax professional.
• Corporate-owned policies are a different story. If a business owns the policy, other rules (including the capital dividend account) come into play.
• Cash value isn't free money. Borrowing reduces what's left for your beneficiaries, and if the loan plus interest grows larger than the cash value, the policy can be at risk of lapsing.

For many families, the right move is to look at the policy loan alongside other options, like drawing from a TFSA, before deciding.

*This article summarises published rules for general information, is current as of October 10, 2026, and is not personalized financial, tax or legal advice.*

Sources

• Financial Consumer Agency of Canada (Government of Canada). "Life insurance." Canada.ca, last modified 2025. https://www.canada.ca/en/financial-consumer-agency/services/insurance/life.html
• Department of Justice Canada. "Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), section 148." Justice Laws Website, current to September 21, 2026. https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-148.html
• Department of Justice Canada. "Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), section 60." Justice Laws Website, current to September 21, 2026. https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-60.html
• Canada Revenue Agency. "IT-87R2, Policyholders' Income from Life Insurance Policies" (archived). 1996. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it87r2/archived-policyholders-income-life-insurance-policies.html

Talk it through with Milo

If you own a whole life policy and you're wondering whether to borrow against it, surrender it or leave it alone, it helps to see your actual ACB and cash value side by side. Milo is an independent broker in Burnaby who works with families across Metro Vancouver, in English or Tagalog. Book a free, no-pressure call and he'll walk you through your options.