Where the line falls between insurance and investment, and what happens if a policy's fund grows past it.
How much you pour into the policy's accumulating fund each year (first 20 years, matching the exempt-test benchmark).
Higher-than-expected growth is the most common reason a policy drifts past the ceiling.
Used to size the policy gain if a deemed disposition is triggered (gain = fund value − ACB).
Exempt status
—
Max exempt deposit
—
per year, at this return
Deemed policy gain
—
fund − ACB at breach
One-time tax hit
—
gain × marginal rate
How this works. To stay tax-exempt, the cash value of a policy's accumulating fund cannot exceed the
Maximum Tax Actuarial Reserve (MTAR): the projected fund of a hypothetical "exempt test policy" (ETP) that
endows (fund = death benefit) at age 85 on 20 years of deposits growing at a 4% minimum, net of the cost of insurance. Each
anniversary the insurer compares your real fund to that ceiling.
Stay below the blue line and investment income compounds tax-free. Cross it, usually from stronger-than-expected returns,
and after a 60-day grace period the policy becomes non-exempt forever: a deemed disposition
(a taxable policy gain of fund value − ACB, at your marginal rate) plus annual accrual taxation on income earned
inside the policy every year after. Remedies exist (raise the face amount up to 8%/yr to lift the ceiling, withdraw cash, or shuttle
the excess to a taxable side fund).
Educational illustration of standard Canadian insurance concepts. Figures are illustrative, not an insurer’s rates.
Illustration only, not a quote or advice. Figures are simplified for education and do not
reflect any specific insurer's rates. Consult a licensed advisor.