The Canada Revenue Agency (CRA) is sounding the alarm on a growing trend in aggressive tax planning. Certain financial arrangements involving critical illness insurance and complex loan structures are being used to avoid paying taxes—and the CRA isn’t having it.
These schemes may look harmless or even legitimate on the surface, but they’re designed to disguise tax-free withdrawals and cheat the system.
Schemes
Here’s the basic play: someone borrows money and uses it to buy a critical illness insurance policy, often through their corporation. In theory, it’s just a regular insurance investment. But dig deeper, and the pieces start to look suspiciously circular.
In many of these schemes, limited recourse loans are used—meaning if the borrower doesn’t repay, the lender can only claim certain assets, typically the insurance policy itself. That creates a setup where there’s little risk to the borrower, but the appearance of legitimate debt.
Structure
Let’s break it down in simple steps:
- A shareholder takes out a loan from a lender tied to a promoter group.
- That money is transferred to the shareholder’s corporation.
- The corporation uses the funds to buy a Critical Illness Insurance Policy, often from an offshore company.
- The loan is recorded as a liability on the corporation’s books.
- The shareholder withdraws funds tax-free, claiming it’s a return of capital or loan repayment.
- The security tied to the loan conveniently cancels the debt.
Looks neat, right? But that’s exactly the problem—too neat. The CRA says this flow of money is circular and artificial, with no real economic substance.
Problems
The key issue is that these transactions pretend to be legitimate insurance or financial strategies but are really just a fancy way to extract money from a corporation without paying taxes. The CRA has found that many of these so-called insurance products don’t even meet the standards of valid policies. They’re just props to support the scheme.
In the past, the CRA has cracked down on similar setups, such as the Offshore Disability Insurance Plan and the Offshore Leveraged Insured Annuity, both of which were used to hide income or avoid taxes.
Risks
Getting involved in these arrangements is risky—really risky. You’re not just looking at a slap on the wrist.
- The CRA can reassess your tax returns and deny all benefits from the scheme.
- You may owe back taxes, interest, and penalties.
- Promoters and advisors can face third-party penalties or even be taken to court.
- And yes, in extreme cases, criminal charges are on the table.
In short, if it looks too good to be true, it probably is.
Enforcement
The CRA isn’t just watching from the sidelines. They’re actively investigating and auditing anyone involved in these schemes. That includes not only the taxpayers participating, but also the companies, advisors, and promoters helping to put these arrangements together.
They’re using new tools, including information-sharing agreements with other countries, to track offshore insurance products and identify participants.
Advice
So what should you do if you’ve been pitched one of these schemes—or if you’ve already participated?
First, don’t panic, but take it seriously.
Here’s what the CRA recommends:
- Talk to an independent tax advisor, not someone connected to the promoters.
- Avoid any deal that promises tax-free withdrawals using insurance or loans.
- Report shady tax arrangements—if you suspect someone is involved in one of these schemes, you can tell the CRA through their Informant Leads Centre or online.
- If you’ve already participated and want to fix it, apply to the Voluntary Disclosures Program. It’s your chance to come clean and potentially avoid penalties.
Contacts
To report tax schemes or get help, here are your options:
| Option | How to Access |
|---|---|
| Report in Canada | Call 1-866-809-6841 or submit online |
| Report international | Use the Offshore Tax Information Program (OTIP) |
| Correct your return | Apply through the Voluntary Disclosures Program |
Trying to game the system with insurance tricks is no longer flying under the radar. The CRA is watching—and if you’re involved, it’s time to take action before they come knocking.
FAQs
What are CRA’s concerns about insurance tax schemes?
They’re used to avoid taxes by disguising money withdrawals as loans or insurance.
What is a limited recourse loan?
It’s a loan where the lender can only claim specific assets if unpaid.
Are critical illness insurance policies illegal?
Not by themselves—but using them in tax schemes is problematic.
What can happen if I’m in one of these schemes?
You could face penalties, reassessments, and even criminal charges.
How can I fix past involvement in a scheme?
Apply to the CRA’s Voluntary Disclosures Program to correct your return.
