The Canada Revenue Agency (CRA) issued guidance August 26, warning Canadians against getting involved in tax schemes involving offshore disability insurance plans and tax schemes involving leveraged insured annuity plans.
Disability insurance schemes claim that taxpayers can get tax-free amounts from a corporation and that the corporation can get a tax write-off – corporate taxpayers make a deposit to the insurer and, through a series of transactions, the insurer advances funds to shareholders, employees or related parties, who in turn loan money back to the corporate tax payer.
“The corporate taxpayer paying the so-called insurance premiums is assured most of its deposit will be loaned back to the corporate taxpayer’s shareholders/employees or related parties and then returned to the corporate taxpayer,” the CRA writes in a statement. “Transactions are done under the guise of a disability insurance plan. The promoter of these offshore money transfers claim they are a legal way to avoid tax.” They may also claim that the corporate taxpayer may deduct their insurance premiums.
Leveraged insurance annuities (LIA), meanwhile involve a loan to the taxpayer that is fully secured by a life insurance contract and an annuity. “The life insurance policy, the annuity and the loan are heavily interdependent, would not have been issued on a stand-alone basis and do not make sense from a commercial sense from the perspective of the purchaser, the provider or the individual being insured if the intent of the policy is, in fact, insurance.”
“The LIA was designed to provide multiple tax benefits, including an increase in a private Canadian corporation’s capital dividend account on the death of any life insured under the life insurance policy, a deduction from premiums, and interest expense of the loan. In 2013, new rules for LIAs were enacted to deny these unintended benefits,” they write. “However, LIAs are still promoted.”
Key features of an LIA scheme include loans that are advanced to participants by offshore lenders on the condition that participants agree to acquire a life insurance contract and an annuity to pay the premiums. The life insurance contract and annuity are then assigned to an offshore lender to repay the loan on death.
In both schemes, the CRA adds that its communication highlights offshore arrangements, but similar concerns can arise with respect to domestic arrangements with the same or similar characteristics.