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Tax Implications of Insurance Proceeds

January 21, 2014

Tax Question:

What are the tax implications of the insurance proceeds my company received?


Insurance proceeds are not always tax-free. If a company asset is lost, stolen or destroyed, the insurance proceeds received are typically based on the replacement cost which may result in taxes.


For tax purposes, your asset has been depreciated over the years and the replacement cost is likely more than the tax value of the asset. Tax is owing on the difference between the tax value and the original cost of the asset and on the difference between the original cost of the asset and the replacement cost if the replacement cost exceeds the original cost. However, there is good news! Tax owing can be deferred to the extent the insurance proceeds are reinvested if the following criteria are met:

  • The disposal of the property was involuntary
  • The property is replaced within 24 months
  • The replacement property is used for the same or similar business purpose.

If the above three criteria are met, you can make an election to use the voluntary disposition of replacement property and defer the tax by reducing the new tax value of the replacement asset. No taxes are owing on the insurance proceeds, instead, the future amortization of the replaced asset is reduced, thereby deferring the tax. This allows you to receive your insurance proceeds with no taxes owing through the reduction of your future depreciation and future tax savings from the asset. Tax may also be avoided if the original cost of the asset was too small to be listed on the tax return or if the pooling treatment of some assets for tax purposes protects you.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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