CRA warns of ‘aggressive tax schemes’ operating in Canada

A photograph of a person looking at the Canadian Revenue Agency's website. (LA PRESSE CANADIENNE/Graham Hughes)

The Canada Revenue Agency (CRA) is warning Canadians about “aggressive tax schemes” that involve “critical illness insurance” designed to avoid taxes, that could lead to participants facing serious consequences.

In a news release issued Thursday, the tax agency said these schemes or arrangements involve complex transactions for reasons including borrowing money to pay for insurance and can mislead taxpayers.

“These schemes often use limited recourse loans, where the lender can only get their money back from certain assets, usually the insurance policy itself,” the news release read.

“If the borrower doesn’t pay back the loan, the lender cannot go after other assets beyond the agreed-upon as collateral.”

The tax agency had issued warnings earlier about similar schemes involving Offshore Disability Insurance Plan and Offshore Leveraged Insured Annuity.

“These arrangements are problematic because they appear to be legitimate insurance transactions but are actually designed to let shareholders take money from their company without paying taxes,” the CRA said.

Typically, these arrangements are promoted by a group of companies or individuals that can be based inside or outside Canada.

The structure of these arrangements creates a “circular flow of funds,” according to the CRA, where a shareholder borrows funds from a third-party lender connected to the promoter group and transfers them to their corporation.

The corporation then uses that money to buy a critical illness insurance, often from an offshore provider, recording the loan as a liability. This allows the shareholder to then withdraw and use the funds tax-free, the CRA explained.

“Those who promote or participate in these schemes can face serious consequences, including penalties, court fines, and even jail time,” the tax agency warned.

The CRA added that the participants in these schemes would be denied the tax benefits received and promoters of the schemes could have to pay third-party penalties.

“Seek independent advice from a qualified and reputable tax professional before entering into any complex financial arrangement,” the CRA advises.

“Be cautious of any scheme that promises to reduce taxes through complicated insurance or loan structures.”