CRA Issues Caution to Canadians: Dangerous Insurance Schemes Highlighted

The Canada Revenue Agency (CRA) has issued a stark warning to Canadians about aggressive tax avoidance tactics that exploit critical illness insurance to dodge taxes. While these schemes may initially appear legitimate, participants could face hefty penalties and legal repercussions.

The CRA indicates that such tactics frequently involve convoluted financial maneuvers that may mislead taxpayers. A prevalent method includes limited recourse loans, where the lender’s claim is confined to a specific asset—typically the insurance policy—if the borrower defaults.

The CRA has previously cautioned against similar schemes, such as Offshore Disability Insurance Plans and Offshore Leveraged Insured Annuities. Although these arrangements may look like standard insurance transactions, they are actually designed to enable shareholders to access company funds without tax obligations.

Often promoted by entities both within and outside Canada, these schemes create a circular flow of money: a shareholder borrows from a third-party lender associated with the promoters, transfers the money to their corporation, and the corporation then buys critical illness insurance, often from offshore sources, while designating the loan as a liability. This setup enables shareholders to access funds tax-free.

The CRA warns that both the promoters and participants of such schemes face severe implications, including hefty fines, penalties, and potential incarceration. Participants risk losing any tax benefits claimed, while promoters could also face additional liabilities.

The agency strongly advises Canadians to consult with qualified tax professionals before entering any complicated financial arrangements. Canadians are urged to be wary of schemes promising tax advantages through complex insurance or loan structures, as these could pose significant legal and financial risks.