If you are an US person - the gain will be your taxable income.
If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income.
Because the same income is also taxable in Canada you may claim a credit for taxes paid abroad on your US tax return.
To determine the amount of credit -the person should use the form 1116 and attach it to his/her tax return. - http://www.irs.gov/pub/irs-pdf/f1116.pdf
Here are instructions - http://www.irs.gov/pub/irs-pdf/i1116.pdf
Let me know if you need any help.