The End of an Era? Why GAAR Now Puts Premium Financing on Shaky Ground

David Kakon

For years, Immediate Financing Arrangements (IFAs) have been promoted to high-net-worth Canadians as a tax-efficient way to fund permanent life insurance. The model relies on a simple premise: pay a large insurance premium out of pocket, then obtain a loan secured by the policy to “replenish” that capital. Rinse and repeat. The borrowed funds are reinvested, and the interest on the loan is claimed as a tax-deductible expense.

The strategy’s appeal hinges on that deduction. But recent changes to the General Anti-Avoidance Rule (GAAR) may now render the deduction—and by extension, the entire structure—untenable. While the CRA has not formally ruled against IFAs, the structure of the replenishment loan now appears to fall within GAAR’s updated enforcement framework.

This article represents my personal opinion and interpretation of the recent changes to the GAAR and their potential impact on insurance planning strategies. Anyone contemplating an IFA should consult with their tax advisors first.

The Replenishment Loan: Technically Legal, Economically Circular

A typical IFA works as follows:

  • The policyholder pays a large premium on a permanent life insurance policy.
  • Shortly after each premium, they take a bank loan for the same amount, secured against the policy’s cash value and/or corporate assets.
  • The loan proceeds are reinvested into a business or holding company.
  • The taxpayer deducts the interest on the loan annually under paragraph 20(1)(c) of the Income Tax Act.

Paragraph 20(1)(c) permits an interest deduction on borrowed funds used to earn income from a business or property. But it includes a crucial exclusion:

“…except to the extent that the interest… (i) relates to a life insurance policy.”

To navigate around this, the IFA uses sequencing: the premium is paid first, the loan comes after, and the borrowing is positioned as independent from the insurance policy. But under GAAR’s new framework, economic substance now trumps legal form—and this sequence may no longer pass scrutiny.

1. Economic Substance Test: Circularity Exposed

The 2024 GAAR amendments introduced an explicit economic substance test. Transactions that are circular, lack independent commercial purpose, or exist primarily to generate a tax benefit can now be disregarded.

That’s where the IFA’s replenishment loan begins to unravel. The structure may be legal in form, but in substance, the loan exists only because the policy was purchased. Without the premium outlay, there would be no borrowing—no need for replenishment, and no deduction.

The result: a loan that appears to support investment but, in reality, exists to re-characterize the interest payment as a deductible interest expense. Under GAAR, what was once tolerated as clever structuring may now be viewed as a clear target.

This may also raise conflict with paragraph 20(2.2), which prohibits interest deductibility on funds borrowed to acquire a life insurance policy. The CRA’s own interpretation bulletin (2000-005146) reaffirms that interest on such funds is not deductible, even if the linkage is indirect.

2. “One of the Main Purposes” Is Now Enough

The original GAAR required the tax benefit to be the primary purpose of a transaction. The new version only requires that it be one of the main purposes. This change dramatically lowers the threshold for the CRA to challenge interest deductions.

In the IFA context, this is pivotal. Most clients would not pursue a long-term leveraged insurance strategy without the ability to deduct interest. That deduction is not incidental—it’s foundational. Even if the loan is eventually invested in a business, if one of the main purposes of the borrowing was to generate a tax benefit, GAAR may apply.

The presence of an economic rationale is no longer enough; it must be clear that the tax benefit was not a driving factor. In many IFA designs, that may be difficult to demonstrate credibly.

3. CRA Is Now Mandated to Prioritize Substance Over Form

The Department of Finance’s budget commentary and GAAR explanatory notes are clear: technical compliance no longer protects tax-driven structures. The CRA will prioritize substance over form and target strategies that manipulate sequencing or layering to achieve a prohibited benefit.

IFAs—particularly those that rely on carefully timed premium payments and post-facto borrowing—are a typical example of the types of structures GAAR is now designed to address. The “pay, borrow, redeploy, deduct” model may now be recast as a single avoidance transaction with no genuine business necessity beyond generating a deduction.

What has changed is not the paperwork—it’s how the CRA is instructed to interpret it.

The Enforcement Toolkit: More Power, More Time, More Consequences

The 2024 GAAR amendments didn’t just redefine abuse—they expanded the CRA’s powers to enforce it:

  • 25% penalty on the denied tax benefit
  • Extended reassessment window, adding three additional years
  • Mandatory reporting of avoidance transactions (while IFAs are not currently designated, future inclusion remains plausible)

Even if the CRA has not yet targeted IFAs in public rulings, they now have the legal architecture to do so—with serious consequences.

What About Clients Who Say, “I Borrow All the Time”?

A common defence is: “I’m a business owner. I borrow regularly. This loan is no different.”

But GAAR doesn’t evaluate general behaviour—it assesses the specific transaction in context. The CRA could ask:

  • Would this loan have occurred if the policy hadn’t been purchased?
  • Is the size and timing of the loan linked to the premium outlay?
  • Is the interest deduction dependent on a series of structured steps?

Even if the loan proceeds were used in a business, if the borrowing wouldn’t have occurred without the insurance premium, the deduction may still be denied. The CRA doesn’t need to show tax avoidance was the only reason—just that it was one of the main reasons.

Practical Guidance for Advisors and Clients

This is not a blanket indictment of all IFAs. But it is a clear signal that the assumptions behind them must now be re-evaluated.

Advisors and clients should:

  • Model the IFA with no interest deduction and assess whether the economics still work.
  • Seek an independent tax opinion—not one issued by someone involved in selling the policy.
  • Avoid renewing or refinancing loans without a GAAR reassessment.
  • Document non-tax motivations, but understand that documentation alone may not be enough.

If the loan exists because of the insurance premium, that connection will be increasingly difficult to defend.

Final Word: The Strategy May Survive, But Its Assumptions Will Not

IFAs were built in a regulatory environment where sequencing and documentation were often enough to survive scrutiny. That is no longer the case. GAAR’s economic substance doctrine, “main purpose” test, and enhanced penalties now expose these arrangements to real and growing risk.

The question is no longer whether IFAs are aggressive. It’s whether they remain defensible. And if the CRA chooses to challenge them—how far back they’ll go, and how costly it will be.

Disclaimer: This article presents a personal opinion of the recent GAAR amendments and their potential impact on Immediate Financing Arrangements (IFAs). It is not intended as legal or tax advice. Readers should consult independent tax counsel before implementing or continuing any premium financing strategy. IFA structures vary, and any analysis should be based on the specific facts of each case. The purpose of this article is to highlight material changes in the legislative landscape and their relevance to current planning practices.