How the money is used
The CRA looks at the direct, current use of the borrowed money, and the corporation must be able to trace it to an eligible use. Interest on money borrowed to acquire a life insurance policy is specifically excluded.
Immediate Financing Arrangement (IFA)
Immediate Financing Arrangements for Corporations
Your corporation funds a permanent life insurance policy, then borrows from a third-party lender using the policy as collateral, so capital can keep working in the business. It's a leveraged concept with real risks to weigh.
What It Is
What is an immediate financing arrangement?
An immediate financing arrangement (IFA) is a way to fund permanent life insurance while keeping capital working in the business. The corporation pays the premium, assigns the policy to a third-party lender as collateral, and borrows against it, usually each year premiums are due.
The policy is usually corporate-owned whole life or universal life, designed to build cash value early. The borrowed money can go back into the business or into other planned, income-earning uses. It's one of the leveraged concepts in our tax strategies overview.
At a glance
- Corporate-owned permanent policyOwned and paid for by the corporation
- Third-party loanSecured by the policy, not a policy loan
- Interest may be deductibleIf the money is used to earn income
- Leverage riskRates, lender terms and policy values all matter
How It Works
How does an IFA work, step by step?
The corporation pays first and borrows second.
Put the policy in place
The corporation applies for coverage on an owner or key person, subject to underwriting and the lender's review.
Pay the premium
It pays the premium from its own cash.
Assign and borrow
It assigns the policy to the lender and borrows, up to the lender's limit, for business or investment use.
Repay the loan
The loan is usually repaid from the death benefit, and the balance stays with the corporation.
Leverage and Collateral
How much can a corporation borrow?
The lender decides, usually based on the policy's cash surrender value. In the early years that value is lower than the premiums paid, so the corporation generally can't borrow back every dollar unless it pledges other collateral.
Limits vary by lender and policy type, and lenders tend to advance more against whole life and fixed-interest values than against equity-linked ones. Pledging other assets can close the gap, but it raises the overall risk.
Interest Deductibility
Is the interest on the loan tax-deductible?
It can be, if conditions are met. Generally, interest must be paid under a legal obligation, be reasonable in amount, and relate to borrowed money used to earn income from a business or property.
A limited premium deduction
Premiums are generally not deductible. A limited part may be, where a bank or similar lender requires the assignment as collateral for a loan with deductible interest. It's generally limited to the lesser of the premium and the net cost of pure insurance, prorated to the amount owing.
At Death
What happens to the CDA at death?
The loan generally doesn't shrink the CDA credit. Where the policy is only collateral and the corporation remains the beneficiary or policyholder, the CRA's position is that the death benefit minus the adjusted cost base goes to the corporation's Capital Dividend Account, even if the lender is paid first.
It does shrink the cash. Once the lender is repaid, the corporation may hold less cash than its CDA balance, so paying capital dividends could mean using other assets.
One exception to know
If the return on the policy's investment account, or its maximum value, is tied to the loan, it may be a 10/8 policy. The CDA credit can then be reduced, and deductions denied.
What to Weigh First
What are the risks of an IFA?
An IFA only works if the policy, the loan and the tax treatment all hold up over decades.
Interest rates
Loan rates often float, and a higher rate can arrive just as policy returns fall.
Lender terms
The plan runs for decades, while lenders typically review it every year. They can ask for more collateral or repayment, or change terms.
Policy performance
Dividends and values above the policy guarantees can change, reducing borrowing room. We illustrate lower dividend scales too.
Forced surrender
A missed collateral call can force a surrender, which can create a taxable gain and ends the coverage.
CRA scrutiny and GAAR
The general anti-avoidance rule can deny a tax benefit where a transaction follows the wording of the rules but misuses them. Since 2024, a significant lack of economic substance points toward misuse, and a penalty, generally 25% of the tax benefit, can apply unless the transaction was disclosed.
Changing rules
In 2013, Parliament removed the tax benefits of leveraged insured annuities and 10/8 arrangements. An IFA is different, but rules can change.
Who It May Fit
Who may an IFA fit?
- A lasting need for coverageEstate, buy-sell or key person
- Strong cash flowEnough to carry premiums and interest
- Income-earning uses for capitalIn the business or investments
- A long horizonInsurable, and comfortable with borrowing
What to Weigh First
When it may not fit
Tight or uneven cash flow
Could the corporation fund the premiums without borrowing, or repay the loan without real harm?
The deduction is the main reason
Insurance should answer a real need. A plan built around the tax result alone invites scrutiny.
Little taxable income
A deduction only helps if there's enough income to absorb it.
How We Work With Your Accountant
Your accountant leads the tax side
We model it
Illustrations at higher interest rates and lower dividend scales.
Your accountant reviews
They confirm the use of the loan, any deductions and the CDA treatment.
We implement
We coordinate the insurer, the lender and the paperwork.
Common Questions
Questions owners ask about IFAs
An IFA borrows from the start, and the corporation is usually the borrower. A corporate IRP borrows later to supplement retirement cash flow, and the loan is usually yours personally, with a corporate guarantee.
No. An IFA loan comes from a third-party lender. Assigning a policy to secure that debt is generally not a disposition for tax, while a policy loan from the insurer is, and can create a taxable gain.
Some arrangements do this, but interest on money borrowed to acquire a life insurance policy is excluded from the deduction, so a plan that relies on it generally uses the loan elsewhere.
Generally not, where the policy is only collateral and the corporation remains the beneficiary or policyholder. It does reduce the cash left after death.
Yes. The CRA can review the deductions, and the general anti-avoidance rule can apply where a tax benefit is one of the main purposes of a transaction and the result misuses the rules. A real business purpose and good records matter.
Related Guides
Strategies that often work together
Corporate-Owned Life Insurance
Permanent coverage owned by the corporation, with tax-sheltered growth and CDA planning.
Read the guideCapital Dividend Account (CDA)
How the CDA lets certain amounts leave a private corporation as tax-free capital dividends.
Read the guideCorporate Insured Retirement Program
A leveraged concept that borrows against a corporate-owned policy to supplement retirement cash flow.
Read the guideThis information is general in nature and is not tax, legal, accounting, insurance or investment advice. It is based on current Canadian tax legislation, which can change. Any strategy should be designed and reviewed with your accountant and legal advisors based on your circumstances. This is a concept, not a product or contract. It involves borrowing, and values above the policy guarantees, including dividends, are not guaranteed. Lending is subject to the lender's approval and terms at the time.
Immediate financing arrangements in Burlington, Oakville, Milton, Mississauga and Hamilton
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