Tax Tip – Warning: The CRA has identified aggressive tax schemes involving insurance products
OTTAWA, ON, Dec. 4, 2025 /CNW/ – The Canada Revenue Agency (CRA) is warning Canadians about certain financial arrangements involving critical illness insurance that may be designed to avoid paying taxes. These arrangements often involve complex transactions, like borrowing money and using it to pay for insurance, which can mislead taxpayers and result in serious tax consequences. The CRA has previously issued warnings about similar schemes including those involving Offshore Disability Insurance Plan and Offshore Leveraged Insured Annuity
How aggressive tax schemes involving insurance products work (CNW Group/Canada Revenue Agency)
These schemes often use limited recourse loans, where the lender can only get their money back from certain assets, usually the insurance policy itself. If the borrower doesn’t pay back the loan, the lender cannot go after other assets beyond the agreed-upon as collateral.
How these arrangements work
These arrangements are typically promoted by a group of companies or individuals, which may include entities based in Canada and abroad. A common setup may look like this:
- A shareholder borrows money from a third-party lender connected to the promoter group.
- The shareholder transfers the borrowed funds to their corporation.
- The corporation uses the money to buy a Critical Illness Insurance Policy, often from an offshore provider.
- The corporation records the loan from the shareholder as a liability, allowing the shareholder to withdraw funds tax-free.
- The security for the loan in step one cancels the shareholder’s obligation to repay the loan. The structure creates a circular flow of funds.
Why this is a problem
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 has found that the insurance products used often do not meet the standards of valid insurance policies and are only used to support the tax scheme.
What are the risks
Those who promote or participate in these schemes can face serious consequences, including penalties, court fines, and even jail time.
The CRA will reassess the participants in the scheme to deny the tax benefits they’ve received and may apply third-party penalties to the promoters and advisors of the scheme.
The CRA actively investigates these arrangements and has taken serious compliance and enforcement actions when they are found to be illegitimate or non-compliant.
What you should do
The CRA strongly recommends that taxpayers:
- Seek independent advice from a qualified and reputable tax professional before entering into any complex financial arrangement.
- Be cautious of any scheme that promises to reduce taxes through complicated insurance or loan structures.
If you suspect a business, charity, or individual of tax or benefit cheating in Canada, you can report it to the CRA:
If you want to report on suspected international tax non-compliance, go to Offshore Tax Information Program (OTIP).
If you’ve participated in such a scheme and want to correct your tax affairs, you can apply for relief through the Voluntary Disclosures Program.
For more information
Visit the CRA’s page on beware of tax schemes that promise to reduce your taxes.
Stay connected
Contacts:
Media Relations
Canada Revenue Agency
613-948-8366
[email protected]
SOURCE Canada Revenue Agency
