The Canada Revenue Agency (CRA) is raising red flags about aggressive tax schemes that misuse critical illness insurance as a tool to avoid paying taxes. These arrangements, often promoted as legitimate financial strategies, are far more risky than they appear — and the CRA says participants could face penalties, fines, or even jail time.
Warning
In a statement released Thursday, the CRA explained that these schemes are structured to mislead taxpayers using a mix of complex insurance policies, offshore providers, and limited recourse loans. On paper, they look like standard financial planning tactics. In reality, they’re designed to help individuals — especially shareholders — extract funds from their corporations without paying taxes.
Tactic
Here’s how these schemes usually work:
- A shareholder borrows money from a third-party lender (usually connected to the promoter of the scheme).
- The borrowed funds are moved to their corporation, which then buys a critical illness insurance policy.
- The loan is logged as a corporate liability, making it look legitimate.
- The shareholder then withdraws the funds tax-free, under the guise of repaying or managing the loan.
The problem? This creates a “circular flow of funds,” where the money just loops through the system without real economic purpose — and the main goal is simply to dodge taxes.
Risks
The CRA says participants in these schemes face serious consequences, including:
- Denial of tax benefits
- Third-party penalties for promoters
- Fines and legal action
- Possible jail time
In short, the perceived benefit — tax-free cash — could result in costly legal trouble later.
History
This isn’t the first time CRA has cracked down on shady tax setups. The agency has previously issued similar warnings about the:
- Offshore Disability Insurance Plan
- Offshore Leveraged Insured Annuity
In all cases, these were marketed as tax-saving strategies that misused insurance products, offshore banking, or complex loan arrangements to disguise what were essentially tax-free withdrawals from a business.
Loans
A common element in these schemes is the use of limited recourse loans. These loans sound harmless but come with strings attached. If the borrower defaults, the lender can only claim specific assets listed as collateral — usually the insurance policy itself.
That’s a red flag. Real loans normally give lenders broader rights to pursue repayment. When that’s missing, it suggests the loan may be part of a manufactured structure created solely for tax avoidance.
Promotion
The CRA said these schemes are usually promoted by groups of companies or individuals, some of whom may operate outside Canada. That makes tracking and enforcement more difficult — but not impossible.
Whether you’re approached by someone promoting a tax-saving insurance strategy or see something online that sounds too good to be true, the CRA recommends caution. The financial promoters might not face the full consequences — you might.
Advice
So what should you do if someone presents you with a “perfect” financial setup involving loans, insurance, and offshore transfers?
The CRA’s message is clear: walk away — or at least, get independent advice.
Their official advice is to consult a qualified, reputable tax professional who is not connected to the promoters of the scheme. Be especially wary of:
- Promises of tax-free withdrawals
- Overly complex loan and insurance combinations
- Offshore structures with little transparency
If it feels like a loophole, chances are it is — and the CRA is watching.
FAQs
What is an aggressive tax scheme?
A setup designed to avoid taxes using complex financial tricks.
Why is CRA warning about critical illness insurance?
It’s being misused in tax schemes to avoid paying taxes.
What is a limited recourse loan?
A loan where the lender can only reclaim certain collateral.
What penalties can participants face?
Loss of tax benefits, fines, penalties, or jail time.
How to avoid risky tax schemes?
Seek advice from an independent, reputable tax professional.
