How is the surrender of a non-registered accumulation annuity taxed?

When a non-registered accumulation annuity is surrendered, only the investment growth portion is subject to taxation. This is because the principal amount that was contributed to the annuity is considered to be the after-tax money of the policyholder, meaning that it was not previously taxed. Therefore, when the annuity is surrendered, the returns or investment growth earned on those contributions are what the tax authority is interested in.

The rationale behind this taxation structure is to ensure that individuals are only taxed on the income or profit gained from their investments, rather than on the principal that they originally invested. This promotes fairness in the taxation system, as it separates the capital contributions from the earnings.

In contrast, options suggesting that no taxes are payable or that the principal amount is taxed do not align with the established tax treatment for non-registered annuities. Additionally, the notion that 100% of the total amount received is taxed misrepresents the tax law, as it does not account for the non-taxed principal. Thus, the correct understanding of the tax implications provides clarity on how non-registered accumulation annuities function in terms of taxation upon surrender.