You need the insurance. You may not need to tie up the capital.
Permanent life insurance is often the right tool for estate planning, buy-sell agreements and key person coverage. But paying $50,000 or $100,000 a year in premiums takes that capital out of the business. An Immediate Financing Arrangement lets the corporation buy the insurance, then borrow against the policy so most of the premium comes back as a loan. The coverage stays in place, and the interest is generally deductible when the money is used to earn income. The trade off is a loan the corporation carries, and pays interest on, for as long as the arrangement runs.
How It Works
Four steps. The insurance provides the coverage, the bank provides the liquidity, and the tax code provides the deduction.
Buy the Insurance
The corporation purchases a permanent life insurance policy on a key shareholder or executive. The policy is structured to build significant cash value over time. Premiums are paid from corporate surplus that would otherwise sit in taxable investment accounts.
Borrow the Premium Back
The corporation assigns the policy as collateral to a lending institution. The bank advances a loan equal to the cash surrender value (or a percentage of it). The loan proceeds go back to the corporation for use in the business or for investment. Most of the premium comes back as borrowed money, which costs interest.
Deduct the Interest
If the borrowed funds are used to earn business or investment income, the interest is generally deductible to the corporation. When the bank requires the policy as collateral, part of the premium may also be deductible, limited by a formula in the Income Tax Act. The corporation continues to pay premiums and loan interest each year.
Settle at Death
The death benefit is paid tax-free to the corporation and repays the outstanding loan, including accrued interest. The amount above the policy's adjusted cost basis is credited to the Capital Dividend Account and can be paid to shareholders as a tax-free capital dividend.
What This Actually Means for You
The IFA solves a specific problem: you need insurance coverage but you do not want to permanently remove capital from the business.
Your capital stays in the business
Without an IFA, paying insurance premiums removes capital from the corporation permanently. With an IFA, the premium dollars are effectively returned through the collateral loan. The corporation gets the coverage without permanently depleting its working capital, in exchange for a loan that must be serviced and is repaid from the death benefit.
The loan interest is tax-deductible
The interest on the collateral loan is deductible to the corporation, provided the borrowed funds are used for income-producing purposes. This creates an ongoing tax benefit that partially offsets the cost of the insurance premiums.
The cash value grows tax-sheltered
Investment income inside a corporation is taxed at about 46.7% in Alberta in 2026 (about 50.7% in BC), with part refunded when dividends are paid. Cash value inside an exempt policy grows without annual tax. Over 20 to 30 years that difference can add up, after allowing for the insurance costs inside the policy.
Policy growth does not count as passive income
Passive investment income above $50,000 a year starts to reduce the federal small business deduction, which raises the tax on active business income. Growth inside an exempt life insurance policy does not count toward that threshold. Income earned on the borrowed money, if invested, still does.
The estate transfer is tax-efficient
The death benefit (less the adjusted cost basis of the policy) is credited to the corporation's Capital Dividend Account. This allows the proceeds to be distributed to shareholders as a tax-free capital dividend. The net result is a tax-efficient transfer of wealth from the corporation to the next generation.
The Trade-offs
The IFA involves coordination between insurance, banking, and tax planning. These are the factors that determine whether it works for your situation.
The IFA requires a permanent life insurance policy with meaningful cash value accumulation. Term insurance does not work because it has no cash surrender value to use as collateral.
Lending institutions set their own terms. Interest rates, loan-to-value ratios, and lending policies can change over time. The strategy assumes continued access to collateral lending at reasonable terms, which is not guaranteed.
The corporation must be able to service both the insurance premiums and the loan interest payments on an ongoing basis. If cash flow becomes constrained, maintaining both obligations creates financial pressure.
If the policy is surrendered before death, the accumulated gains become taxable and the loan must be repaid. The strategy is designed to remain in place until the death of the insured.
CRA scrutinizes leveraged insurance arrangements. It ended a related arrangement (the 10/8 arrangement) in 2013, and the general anti-avoidance rule was broadened in 2024. The arrangement must have a genuine business purpose and be properly documented for the interest deduction to hold. Professional tax and legal advice is essential.
This strategy is not suitable for everyone. It works best for corporations with consistent surplus, a need for permanent life insurance, and a long time horizon. The economics improve significantly over 15 to 25 years.
Common Questions
How is the IFA different from the IRP?
Both use permanent life insurance, but they serve different purposes. The IFA is about keeping capital in the business while building insurance coverage. The loan proceeds go back to the corporation for business use. The IRP is about creating retirement income: the policy is used as collateral for loans that fund retirement, and how that money reaches you depends on who owns the policy. Some strategies combine elements of both, but the core mechanics and objectives are distinct.
What type of insurance policy works best?
Whole life and universal life policies are both used. Whole life offers more predictable cash value growth and is generally preferred by lending institutions because its cash values are guaranteed, although policy dividends are not. Universal life offers more flexibility in premium payments and investment options but may have less predictable cash values. The choice depends on your risk tolerance, cash flow, and the lending institution's requirements.
Can the corporation deduct the insurance premiums?
Generally, life insurance premiums are not tax-deductible. When a lender requires the policy as collateral for a business loan, part of the premium may be deductible, limited to the lesser of the premium and the policy's net cost of pure insurance for the year, in proportion to the loan. The interest on the loan is deductible if the borrowed funds are used to earn business or investment income. Your accountant confirms both.
What happens if the bank changes its terms?
This is a real risk. If the bank reduces the loan-to-value ratio, increases the interest rate, or stops offering collateral loans against insurance policies, the strategy may need to be restructured. Working with institutions experienced in insurance-backed lending helps mitigate this risk, but it cannot be eliminated entirely.
Find out if the numbers work for you.
The IFA depends on your corporate cash flow, your need for permanent insurance and your long term use for the capital. A short call is enough to tell whether it is worth an illustration.
This information is general and does not constitute financial, tax, or legal advice. Immediate Financing Arrangements involve complex insurance, banking, and tax considerations. This strategy is not suitable for everyone. Confirm any decision with your accountant and lawyer. Tax rules, interest rates and policy values change, and values that are not guaranteed can be lower than illustrated. Five Ridge Financial Ltd. is licensed to sell life insurance and segregated fund contracts in Alberta and British Columbia and is paid commissions by insurers on policies placed.