What insurance structures are keeping the Canada Revenue Agency up at night?
In response to Question 7 at the 2018 Conference for Advanced Life Underwriting (CALU) Canada Revenue Agency (CRA) roundtable, the CRA provided a list of arrangements they consider to be aggressive, Golini-like or worth examining. The Golini case involved a complex, offshore, leveraged insurance arrangement that, in part, used a corporate-owned life insurance policy to secure a personal loan to the shareholder.
The CRA provided this comment: “The CRA continues to be concerned with planning arrangements similar to those undertaken in the Golini case.” They noted that the appeal was withdrawn and the Tax Court decision remains. For a summary see: Status update on the Golini case – what does it mean for leveraged insurance arrangements with shareholder borrowing
Also of specific concern are leveraged insurance arrangements “where products that form part of the arrangement are heavily interdependent and would not have otherwise been issued in the absence of the others.” This category seems to include arrangements that appear to circumvent the Leveraged Insured Annuity (LIA) policy rules. Here’s how one example was described:
The new arrangements identified thus far entail manipulating the terms of the products (including pricing) that form part of the arrangement, including the issuance of products that would not have otherwise been issued on a stand-alone basis. An example of this might be the issuance of life insurance policies on the lives of high-risk individuals or persons not connected to the underlying business or in any way connected to (or necessary for) the underlying borrowing to enhance tax deductible premiums paid in circumstances where the life insurance policies are intricately tied to refundable annuity contracts….
The CRA didn’t provide any detail on another category of concern: “schemes seeking to exploit the preferential treatment in respect of the capital dividend account (CDA) of private corporations receiving life insurance proceeds.”
In addition to being willing to apply the general anti-avoidance rule (GAAR), the CRA said that it will bring newly identified arrangements to the attention of the Department of Finance to determine if further legislative action is warranted.
The CRA noted that it “is continuing its review of alternative products offered to policyholders by certain insurance companies as a replacement for 10/8 structures.” In particular, the CRA has concerns with “the restrictions attached to the replacement investment accounts when such accounts are not used to obtain a collateral loan.” The CRA is still in the middle of this review.
Strategies that include offshore elements could signal more aggressive planning to the CRA and trigger their close scrutiny. But even domestic strategies could involve some of these aggressive elements.
With tax planning, an ounce of prevention is better than a pound of cure. If your client is shown a leveraged insurance strategy that makes you think it could be one of these “schemes,” give them a copy of the CRA’s response to this question and steer them in another direction.
If it looks too good to be true, it probably is!