Is your Immediate Financing Arrangement (IFA) exposed to CRA retroactive audit risk?
If your corporate life insurance plan was structured to:
1) Borrow a loan equal to the premium,
2) Deduct that loan interest, and
3) Hold the loan indefinitely until death,
The CRA’s active legal position is that this fulfills the mathematical definition of a tax shelter (under s. 237.1 and s. 143.2 of the Income Tax Act).
If the plan is, in fact, a tax shelter and is unregistered, the penalties being issued are severe: a 100% retroactive denial of all historical tax deductions from day one and a reduction of your policy cost basis to $0. There is no statute of limitations.
Attached is a detailed technical memo. If this scenario sounds like your corporate life insurance structure, do not rely on verbal reassurances; have both your insurance agent and your tax advisor confirm, in writing, whether your plan requires a Tax Shelter ID number.
For a comprehensive understanding of the implications and necessary precautions, please refer to the complete analysis available at https://tax-shelter.ca.
Armstrong Financial Services Inc. is not engaged in rendering tax or legal advice. This memo contains a general discussion of certain tax and legal developments and should not be construed as tax or legal advice.