The Tax Court of Canada recently released its decision in Honey v. The King (2026 TCC 170). While the case formally addresses the disallowance of interest deductions on legacy 10/8 life insurance policies, the judicial reasoning dismantles the exact legal defences currently propping up today’s leveraged structures—specifically, Immediate Financing Arrangements (IFAs).
If you are a professional advising on, structuring, or participating in financed insurance strategies, the mechanics of how the CRA won this case serve as a direct blueprint for possible similar enforcement against IFAs.
Here is why the legal groundwork laid in Honey should put the industry on high alert:
1. The “Audit Lottery” Defence is Dead A persistent myth in the insurance space is that the CRA lacks the resources to audit individual policyholders. The timeline of the Honey case proves they do not need to. The taxpayers were reassessed for their 2009 to 2013 taxation years. The CRA did not find them by knocking on the doors of local businesses; they went directly to the top of the pyramid. By securing an Unnamed Persons Requirement for Information (RFI) against the carrier (MNR v. RBC Life Insurance Co., 2011 FC 1249), the CRA legally extracted the entire national database of purchasers and deployed automated, systemic reassessments.
2. The Courts Will Readily Collapse “Siloed” Contracts Promoters of IFAs and other leveraged plans routinely argue that the life insurance policy and the bank loan are entirely separate, arm’s-length commercial transactions. Justice Russell explicitly rejected this “siloed” framing. The Court analyzed the flow of funds—from the operating company, into the policy’s collateral investment account, out through the investment credit facility, and back into the operating company. Because of this economic circularity, the Court ruled that the unrelated parties were engaged in a factual non-arm’s length transaction under paragraph 251(1)(c) of the Income Tax Act.
3. Zero Lender Risk Invalidates Commercial Market Defences When challenged, the industry frequently relies on the Supreme Court’s Shell Canada decision to argue that loans underwritten by Schedule I banks represent standard commercial market transactions. In Honey, the Court shut this down. Because the required deposits in the collateral investment account perfectly matched or exceeded the borrowed amount, the Court noted that the lender bore absolutely no credit, term, or liquidity risk. The judge concluded that with zero risk, there were no genuine market forces establishing the rates, stripping away the Shell Canada defence entirely.
The IFA Pivot: From Subjective Defeat to a Mathematical Trapdoor It seems to me the most relevant takeaway for some current leveraged insurance planning is that the courts are more than willing to look past the paperwork and collapse the plan to address its economic circularity and quantum.
But there is a meaningful difference between the legacy 10/8 policies and today’s IFAs.
In Honey, the CRA used a subjective, discretionary tool—arguing over the “reasonable amount” of interest under subparagraph 20(1)(c)(i). For IFAs, the CRA does not need judicial discretion. While the 10/8 promoters in Honey were defeated on somewhat subjective grounds, related leveraged plans today could be standing on a brutally mathematical statutory trapdoor.
See the full IFA Tax Shelter analysis at tax-shelter.ca
SERVICES FINANCIERS ARMSTRONG INC.
Cabinet en assurance de personnes
ARMSTRONG FINANCIAL SERVICES INC.
Firm in the insurance of persons
David E. Kakon, B.Sc. (Math Hons.)
Financial security advisor
David@ArmstrongLife.com
http://ArmstrongLife.com
Tel. (514) 574-0233
Fax. (514) 447-1804
Disclaimer: This article, including any mathematical examples, case studies, and interpretations of the Income Tax Act, is provided for educational and informational purposes only and represents the personal opinion of the author. It does not constitute legal, tax, accounting, or financial advice. The application of tax shelter definitions, the General Anti-Avoidance Rule (GAAR), and Canada Revenue Agency (CRA) enforcement policies to Immediate Financing Arrangements (IFAs) is highly complex and depends heavily on the specific facts, documentation, and structure of each individual case. Tax laws, regulations, and CRA administrative positions are dynamic and subject to change, potentially retroactively. Readers, including professional advisors, should not act or rely upon any information contained herein without first seeking independent, qualified tax and legal counsel tailored to their specific circumstances. The author assumes no liability for any errors or omissions, nor for any assessments, penalties, or financial damages arising from actions taken or not taken in reliance on the contents of this article. Reviewing this article does not establish an advisor-client relationship, nor is any offer to review policies intended to solicit or infringe upon any existing relationships. © ARMSTRONG FINANCIAL SERVICES INC. 2026