Johann owns a $250,000 whole life insurance policy. The policy has a cash surrender value (CSV) of $55,000 and an adjusted cost basis (ACB) of $30,000. Johann would like to cancel his policy and use the cash surrender value to fund a new business. If his marginal tax rate is 40%, how much will he have left after cancelling his policy?

When a life insurance policy is surrendered, the policy gain is subject to income tax. The policy gain is calculated as the Cash Surrender Value (CSV) minus the Adjusted Cost Basis (ACB). This gain is taxed at the policyholder's marginal tax rate.
1. Calculate Policy Gain: $55,000 (CSV) - $30,000 (ACB) = $25,000
2. Calculate Tax Payable: $25,000 (Gain) × 40% (Marginal Tax Rate) = $10,000
3. Calculate Net Proceeds: $55,000 (CSV) - $10,000 (Tax Payable) = $45,000 Johann will have $45,000 left after cancelling his policy and paying the required income tax.

A. $30,000: This is the Adjusted Cost Basis (ACB), which represents the non-taxable portion of the proceeds, not the final amount Johann receives.
B. $33,000: This figure results from incorrectly applying the tax rate to the entire Cash Surrender Value ($55,000 x (1-0.40)), failing to subtract the ACB first.
D. $55,000: This is the gross Cash Surrender Value before the tax on the policy gain has been calculated and paid.

1. IFSE Institute, Life Insurance (LLQP), 2023.

Taxation Module, Chapter 4: Taxation of Insurance Products, Section 4.2 Dispositions. This section explicitly states that upon the surrender of a life insurance policy, the policy gain (defined as Proceeds of Disposition less the Adjusted Cost Basis) is included in the policyholder's income for that year and taxed at their marginal rate. The calculation method used in the explanation directly follows this principle.

2. Government of Canada, Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)), s. 148(1), s. 148(2).

Section 148 of the Income Tax Act governs the taxation of life insurance policies. It specifies that the amount to be included in income upon a policy disposition is the amount by which the proceeds of the disposition exceed the policy's adjusted cost basis.

3. Queen's University Faculty of Law, Introduction to Personal and Business Taxation Courseware, 2023.

Module on Investment Income, Section: Life Insurance Policies. The course materials detail that a disposition of a life insurance policy for proceeds (like a cash surrender value) triggers a taxable event. The taxable income is calculated as Proceeds minus the Adjusted Cost Basis (ACB), consistent with the Income Tax Act.