@GaryinOz2002 , as I mentioned earlier , most foreign life insurance schemes are treated as Passive Foreign Investment Company ( PFIC) and therefore one pays tax on the yearly gain ( a formulation based on surrender value, contribution and value at death ). There are ways around this but is quite expensive.
If I assume that you have been here in the USA for number of years and never reported / recognized this tax ( Mark-to-Market approach ) this earning, and that you are currently have or will soon liquidate/ surrender the life insurance policies and recognize the total amount for these policies, then the easiest way to handle this is ( for each policy being liquidated :(
(a) prepare a spread sheet that shows, year by year the amount of contribution to the policy, the surrender value for the year and pay-out on death -- face value of the policy; in the contributions also include any other required expenses / fees etc. that you had to pay.
( b ) Convert all these Canadian currency contributions to US$ using the exchange rate prevalent at the time ( IRS / Treasury publishes yearly average rate for all the past years )
(c) At the end of this exercise what you should have are two figures that you need --- total contribution in US$ and the total US$ you get at surrender. The difference between the two is treated as interest earning { it is ordinary income and is the category where it fits nicely and suggested by the IRS ).
(d) please keep the print-out of the spread sheet for your records in addition to the back-up details of the transactions on the policy over the years ( to the extent feasible -- your policy admin should be able to give you this ). These are essential in case of an audit --- show that you followed a logical path and based on back-up data.
On the subject of foreign taxes paid , generally --- you use form 1116 to report the foreign income and the taxes paid thereon. However note that while IRS will recognize the total amount of taxes paid ( us$) but available for the year is limited by a ratio of foreign income to world income . The un-used portion of the credit can be carried back or carried forward-- but to avail it you still need foreign income ( because the same ratiometric limitation would be applied. A safe harbor ( from the limitation and therefore use of form 1116 ) amount of US$ 300 per taxpayer is also available ( i.e. US$600 per jointly filed return ).
An erroneous but sometimes used method is to subtract the foreign tax from the received amount ( i.e. use the net foreign income-- post foreign tax ). Depending on your total income from US sources ( assuming this liquidation is your only foreign income ), this method may not change the IRS take enough to trigger audit. If you are going to use this method ( i.e. net of foreign taxes ), please work out both ways to make sure that it is worth your while.
I did go through the US-Canada treaty and the associated protocols and while there is carve out for Canadian pension plans , there is none for Life Insurance. So ...
I hope I have answered your query sufficiently. Is there more I can do for you?
pk
