The recent GAAR amendments enacted through Bill C-59 mark a turning point for Immediate Financing Arrangements (IFAs). While previously tolerated due to sequencing and legal form, these leveraged insurance strategies could now be exposed to reassessment on the basis of economic substance and purpose. For accountants advising clients with IFAs—or considering one—the deductibility risk is now central.
A Reimbursement Loop, Not a Capital Loan
At the heart of an IFA is a reimbursement-style mechanism:
- A permanent life insurance policy is funded using after-tax capital.
- A loan is immediately taken to replenish that capital, secured by the policy and/or corporate assets.
- The loan proceeds are reinvested, and interest is claimed under paragraph 20(1)(c) as a deductible expense.
While technically structured as a business loan, the arrangement raises questions about economic exposure. The insured pays a premium and almost immediately recoups the outlay through a loan, meaning the capital was never really at risk. CRA may now be more likely to challenge the substance of the loan, particularly if viewed as circular, with the real purpose being to convert non-deductible life insurance costs into deductible interest.
Paragraph 20(1)(c): The Carve-Out for Insurance
Paragraph 20(1)(c) allows interest deductibility only where borrowed funds are used to earn business or property income. But it explicitly excludes interest relating to a life insurance policy, even indirectly. Some IFA promoters have historically relied on sequencing to avoid this exclusion, arguing that the loan is not directly tied to the policy. The revised GAAR now allows CRA to disregard that sequence if the economic substance reveals otherwise.
CRA’s longstanding position (e.g., Interpretation Bulletin 2000-005146) supports denying deductibility when loans merely replenish premiums. That position now has legal teeth under the revised GAAR framework.
Bill C-59: Three Key Changes That Jeopardize IFAs
- Lower Threshold for GAAR
GAAR now applies if one of the main purposes of a transaction is to obtain a tax benefit—not the sole or dominant purpose. Many IFAs fail this test, as the interest deduction is central to the structure’s economics. - Economic Substance Test
CRA can disregard transactions that are legally valid but lack real economic purpose. If the loan exists only because the premium was paid, the CRA may view the borrowing as lacking substance, even if technically reinvested. - Disclosure and Penalties
IFAs may eventually be included in CRA’s mandatory disclosure rules. Failure to report could trigger an unlimited reassessment period; even if disclosed, CRA now has three additional years to audit under GAAR. If GAAR applies, a 25% penalty applies to any tax benefit denied. The long-term risk exposure is significant.
Questions CRA Could Ask
- Would the loan exist if the policy hadn’t been purchased?
- Was the borrowing size/timing linked to the premium?
Documentation of business purpose may not suffice if the economic reality shows the loan functions as a reimbursement for the premium. Furthermore, CRA may pursue legislative or interpretive changes—such as denying interest deductibility on any debt collateralized by exempt assets like life insurance, or recharacterizing such loans as policy loans. In that case, not only would the interest become non-deductible, but the loan proceeds themselves would be taxable beyond the policy’s adjusted cost basis (ACB).
If this seems beyond the pale, accountants should revisit the Department of Finance’s 2013 Budget, which dismantled the 10-8 leveraged insurance strategy on the grounds of circularity and artificial interest deductibility. At the time, Finance warned that any future attempts to circumvent these rules—through similar structures or slight variations—would be dealt with more harshly, and that retroactive measures would be considered.
Compounding the issue, IFA marketing materials and policy illustrations often undermine the claim that the loan is independent of the policy. They frequently include tables showing a direct link between the premium and the loan, implying the borrowing simply replaces the outlay. The strategy’s branding often suggests the policy is no-cost or self-financing, implying that the tax deduction and bank loan offset all out-of-pocket costs. This framing makes it difficult to argue later that the loan had a separate, arm’s-length business purpose.
Professional Responsibility Going Forward
- Model IFA scenarios with no interest deductibility to evaluate whether the structure remains viable absent tax relief.
- Stress-test policy performance by reducing illustrated returns by 1% and 2%. In many cases, debt accumulation will exceed collateralized fund value.
- Disclose GAAR exposure. Clients must understand that deductibility may no longer be tolerated, even if the loan is technically legitimately invested.
- Calculate taxable exit costs in later years, notably when the policy’s ACB has declined, as this may result in unexpected tax liability and significant financial loss on policy disposition and loan repayment.
Conclusion
The revised GAAR rules turn IFA planning into a strategy that may now be more susceptible to CRA scrutiny. Without defensible deductibility, the economic rationale may be significantly weakened—leaving the client with a leveraged, long-duration liability and no tax relief. Worse, the strategy’s own structure prevents an efficient exit: the policy’s declining ACB results in significant taxable gains upon surrender, and because the loan is intentionally positioned as unrelated to the policy, the debt cannot offset that gain.
What began as a tax-advantaged planning tool may now be recast as a GAAR-triggering avoidance transaction—with penalties, reassessments, and a high likelihood of post-sale scrutiny. Accountants have a clear responsibility: reassess past recommendations, scrutinize any current IFA structures, and ensure that clients understand the full scope of tax, legal, and financial risk now in play. The assumptions that may have once justified the risks no longer hold under Bill C-59.
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.
Armstrong Financial Services 