A Foundational Guide to Immediate Financing Arrangements (IFAs)

(Part of the Taxevity Navigator Series)

Introduction

The Immediate Financing Arrangement (IFA) stands as one of the most powerful, yet frequently misunderstood, financial strategies available to affluent Canadians and their corporations. Its core function is to allow the capital allocated to life insurance premiums to perform multiple duties — simultaneously providing essential protection for estate preservation while being immediately redeployed for wealth growth.

This foundational guide, part of our Taxevity Navigator series, deconstructs the Immediate Financing Arrangement for financial professionals and detail-oriented clients. The analysis will explore its intricate mechanics, the precise profile of the ideal candidate, its multifaceted strategic applications, the inherent risks and their mitigation, and its place within a comprehensive wealth management plan. You will be guided from a fundamental understanding of the IFA’s structure to a nuanced appreciation of its strategic power for wealth amplification and estate planning.

Part 1: The Immediate Financing Arrangement (IFA) in Detail

The Immediate Financing Arrangement is best understood as a multi-layered financial strategy based on protection, not merely a loan product. The structure is built upon a triangular relationship between the policyowner, an insurer, and a third-party lender. The following sections will detail how these three elements work in concert to achieve the core purpose of an IFA: making a single dollar of capital perform multiple duties simultaneously.

Section 1.1: Defining the Immediate Financing Arrangement

The Immediate Financing Arrangement (IFA) is a sophisticated made-in-Canada financial strategy that integrates permanent life insurance with third-party lending. It is designed primarily for high-net-worth individuals and profitable private corporations. At the core, the IFA is a capital efficiency strategy paired with a need for insurance, not merely a loan product. The fundamental purpose is to resolve a significant capital allocation dilemma: how to secure the substantial life insurance coverage required for robust estate planning or business succession without typing up large amounts of capital that could otherwise be deployed in higher-return ventures like business operations or investment portfolios.

The IFA enables capital to perform multiple functions, effectively allowing it to “work thrice”.

1. First, capital is deposited into a specially designed permanent life insurance policy, where it quickly builds cash value in a tax-sheltered environment.
2. Second, through a tax-free collateral loan (a loan secured against the policy’s value), an equivalent amount of capital is immediately made available to be reinvested back into the client’s business or investment portfolio.
3. Third, the potential tax deductions generated by the strategy (for loan interest and possibly a portion of the insurance premiums) reduce the corporation’s tax bill, freeing up additional capital that would have otherwise been lost to tax.

This multi-layered structure is engineered to preserve liquidity while simultaneously establishing a significant, tax-advantaged asset in the form of the life insurance policy.

For an introduction for business owners, see What is an IFA? An Overview for Canadian Business Owners. For a general introduction, see An Overview for Canadians.

Section 1.2: The Mechanics of an IFA: A Step-by-Step Transactional Flow

The implementation of an Immediate Financing Arrangement follows a structured, multi-step process that involves careful coordination between the client, their advisors, the insurer, and the lender.

Step 1: Acquiring and Structuring the Foundational Asset (The Life Insurance Policy)

The process commences with the acquisition of a permanent life insurance policy, which serves as the bedrock of the entire strategy. The preferred vehicle is typically a participating (par) whole life insurance policy. Lenders favour the contractual guarantees, stable growth, and predictable cash surrender value (CSV). In contrast, the flexibility of universal life (UL) can be a detriment for lending purposes as the underlying investments can be volatile. Lenders who permit loans against UL policies often impose restrictions on investment choices (e.g., limiting them to more stable but lower-yielding options) and may offer a lower loan-to-value ratio.

For this reason, participating whole life is the standard for an IFA. The policies used in IFAs are ones that have been specifically engineered to maximize high early CSV. This is typically achieved by using policy features to “over-fund” the contract with annual premium deposits that are significantly higher than the base cost of the insurance.

To secure long-term tax deductions, the underlying policy often has lifelong premium commitments (“life-pay”). However, after an initial active funding period (e.g., 10 years), future premiums are typically paid from policy dividends using an arrangement called a “premium offset”. This structure ensures the policy remains in force for life while limiting the client’s out-of-pocket funding period. A detailed insurance illustration is a critical document provided to the lender, but at Taxevity, we go beyond insurer templates. We use our own proprietary models with conservative assumptions to make the mechanics and potential outcomes easier for you and your advisory team to understand.

Step 2: The Collateral Loan Agreement with a Third-Party Lender

Once the insurance coverage is in place, the policyowner formally assigns the policy and its associated CSV as collateral to a third-party lending institution. To qualify for key tax deductions, this loan must come from a “restricted financial institution”, a category that generally includes Canadian banks and trust companies. This collateral assignment secures a revolving line of credit, which provides maximum flexibility for the borrower. Many clients begin the process with their own bank, but if they find the costs high, process cumbersome and/or timeline slow, they may select a lender specializing in IFA loans.

The loan rates are typically based on the prime rate plus a spread, with larger loans often receiving more favourable pricing. Lenders have stringent eligibility criteria. Their requirements for a minimum loan facility (e.g., a total loan of at least $500,000 within ten years) are what drive the scale of the IFA. The loan minimums typically translate into a requirement for minimum annual premiums of $50,000 to $100,000 for 10 years.

Additionally, lenders will assess the client’s financial strength, requiring a substantial net worth (e.g., at least eight times the annual premium) and stable income. The client must qualify for the loan independent of the insurance policy itself. Finally, there are direct costs to consider, such as one-time setup fees and potential annual administration fees from the lender.

Step 3: The Flow of Funds: Premium Payment and Immediate Financing

The flow of funds is the defining mechanical step of the IFA. At the beginning of each policy year, the policyowner pays the full annual insurance premium out-of-pocket, using non-borrowed funds. Before advancing funds from the line of credit, lenders typically require proof of this premium payment, and sometimes an updated in-force illustration from the insurer. Immediately following this, the policyowner executes a draw on the line of credit, borrowing back a significant portion of the funds just paid.

The loan amount can be up to 90-100% of the policy’s current CSV. Lenders may allow a loan of 100% of the annual premium paid, but this typically requires posting additional collateral (such as other investments or real estate) to cover the “collateral gap” that exists in the early years when the value of the total premiums paid exceeds the policy’s CSV. This loan advance is received the borrower as a non-taxable receipt of loan proceeds.

Step 4: Servicing the Debt and Re-deploying Capital

Unlike some other leveraged strategies, such as an Insured Retirement Plan, the interest on an IFA loan is not capitalized; instead, the borrower is responsible for making regular interest payments directly to the lender, typically on a monthly basis.

The borrowed capital is then re-deployed for an income-generating purpose. For a corporation, this often means reinvesting in core business operations or expansion projects. For an individual or a corporate investment holding company, the funds are typically used to purchase assets such as income-producing real estate or a portfolio of dividend-paying stocks. This re-deployment is not merely a suggestion; it is a critical step required to establish the legal basis for the potential tax-deductibility of the loan interest. As the rules are complex, clients should consult with their accountant regarding their specific situation. As an additional resource, we prepared an Accountant Companion: Navigating Canadian Interest Deductibility for Investment Loans.

Step 5: The Endgame: Loan Repayment

The IFA is a long-term strategy with a flexible but clear repayment plan. The loan is designed to be repaid by the policy’s tax-free death benefit. As collateral assignee, the lender has first claim to the death benefit proceeds and is repaid the outstanding loan balance. The remaining net amount is then paid to the named beneficiary.

Lifetime repayment offers another path. A client might choose this route upon selling the leveraged investment or experiencing a major improvement in their cash position. The main appeal is the psychological benefit of becoming debt-free. However, this decision comes at a cost. To repay the loan, the client would likely need to liquidate the assets purchased with the borrowed funds—an action that could trigger a large capital gains tax liability and prematurely end the leveraging strategy. Therefore, the decision to exit early requires a careful analysis, weighing the desire to deleverage against the potential tax consequences.

Section 1.3: The Ideal IFA Candidate: A Profile

The IFA is a niche strategy, explicitly designed for a select demographic. The ideal candidate must possess reasonably good health, sufficient taxable income to benefit from deductions, and a specific combination of financial capacity, risk tolerance, and long-term objectives.

Successful Business Owners

This is a core group for the IFA strategy. Business owners often face a dual challenge: needing to maintain liquidity for operational needs and growth opportunities while also planning for the eventual transfer of their company. An IFA allows them to secure insurance for buy-sell agreement funding or to cover the significant tax liability that arises from the deemed disposition of their business at death. The strategy converts a static premium payment into dynamic capital, making funds immediately available for reinvestment into core business operations or expansion projects.

Incorporated Professionals

This group, which includes physicians, dentists, lawyers, and other incorporated professionals, is also an ideal fit. They often accumulate significant retained earnings within their professional corporations. Holding these funds as passive investments is highly tax-inefficient, as this investment income is subject to high rates of tax, often exceeding 50% (e.g. 50.17% on all passive corporate investment income in Ontario). The IFA provides a powerful solution, allowing the corporation to fund a life insurance policy (where cash value growth is generally not taxed annually) while immediately accessing equivalent capital through a collateral loan. This preserves essential liquidity and maximizes the corporation’s capital efficiency, freeing up funds for business purposes or other strategic investments.

The High-Net-Worth Individual/Family

For affluent individuals and families, the IFA serves as a powerful estate planning and wealth transfer tool. These clients often have a significant tax liability looming on death, arising from the deemed disposition of assets like a family business, a large investment portfolio, or a vacation property. A large permanent life insurance policy is often the most effective tool to provide the immediate, tax-free liquidity needed to cover these taxes. The IFA allows them to acquire this coverage while keeping their existing investment strategy intact.

Financial Underwriting Thresholds

Suitability for an IFA extends beyond a general profile to strict financial underwriting requirements from both the insurer and the lender. The candidate must be:

• Insurable: They must qualify for a large permanent life insurance policy based on their health and lifestyle.
• Financially Robust: They must have a strong and stable cash flow, a high net worth (lenders may require a net worth of at least 8 times the annual premium), and sufficient liquid assets to demonstrate they can service the debt and withstand market volatility.
• Comfortable with Leverage: The candidate must have the appropriate risk tolerance and a clear understanding of the risks associated with borrowing to invest over a long time horizon.

The strategy is explicitly not intended for individuals or businesses that cannot afford the insurance premiums without resorting to financing. A key principle for consideration is that the strategy is best suited for those who possess the assets to support the annual premium payments without borrowing, or to repay the entire loan without a punitive impact on their lifestyle or business operations.

Section 1.4: Critical Tax Considerations and Advantages

The tax efficiency of the IFA is a primary driver of its value proposition. This efficiency is derived from several interconnected provisions within Canada’s Income Tax Act (ITA).

Tax-Sheltered Growth

A foundational benefit is the tax-deferred growth of the cash value within an exempt life insurance policy. For a corporation, this is particularly powerful. Investment income earned in a corporation’s standard investment account, which is non-registered by nature, is considered passive income and is taxed at high marginal rates (over 50% in many provinces). This high tax rate acts as a significant drag on growth. By contrast, the growth within the life insurance policy is sheltered from this annual taxation, allowing capital to compound more efficiently over time.

The Interest Deductibility Rule (ITA 20(1)(c)(i))

One of the most significant tax advantages of a properly structured IFA is the potential for the loan interest to be tax-deductible. According to subsection 20(1)(c)(i) of the ITA, interest paid on borrowed money is deductible if the funds are used for the purpose of earning income from a business or property.

This benefit is not automatic and requires rigorous discipline. To qualify, there must be a clear and direct link between the borrowed funds and an eligible income-producing investment. This necessitates meticulous tracing of funds. Commingling the loan proceeds with other funds can jeopardize the deduction. To support your advisory team, we have prepared detailed guides on this topic:

• Accountant Companion: Navigating Canadian Interest Deductibility for Investment Loans
• Wealth Advisor Companion: A Guide to Interest Deductibility for Leveraged Investing

The Collateral Insurance Deduction (NCPI – ITA 20(1)(e.2))

In addition to the interest deduction, a portion of the life insurance premium itself may be deductible under subsection 20(1)(e.2) of the ITA. The amount of the deduction is limited to the lesser of the annual premium payable and the policy’s Net Cost of Pure Insurance (NCPI) for that year. To secure this deduction over the long term, policies are often structured with lifelong premium obligations (“life-pay”). After an initial funding period (often 10 years), these premiums are intended to be paid from nonguaranteed policy dividends via a “premium offset” arrangement.

The Capital Dividend Account (CDA)

For corporate-owned IFAs, the creation of a Capital Dividend Account (CDA) credit upon the death of the insured is arguably the most powerful long-term benefit. When the corporation receives the life insurance death benefit, the amount of the proceeds in excess of the policy’s Adjusted Cost Basis (ACB) is credited to the corporation’s CDA. The CDA is a notional account that tracks various tax-free surpluses received by a private corporation. As a policy matures, the ACB will typically grind down, often to zero by life expectancy, which means the full death benefit can eventually become a credit to the CDA.

The balance in the CDA can then be paid out to the corporation’s shareholders (in this case, the deceased’s estate) as a tax-free capital dividend. This provides the estate with a crucial infusion of tax-free cash.

Furthermore, Surplus CDA Capacity is often created. The CDA credit is based on the death benefit less the policy’s ACB, but the cash used to repay the loan is based on the loan balance. Since the ACB is typically lower than the loan balance in the later years of the policy, this difference creates a surplus CDA credit, allowing for even more tax-free capital to be distributed from the corporation.

Numerical Example: Surplus CDA Capacity

• Total Death Benefit paid to corporation: $5,000,000
• Outstanding Loan Balance repaid to bank: $2,000,000
• Policy’s Adjusted Cost Basis (ACB) at death: $100,000

1. Net Cash to Corporation: $5,000,000 – $2,000,000 = $3,000,000
2. CDA Credit Created: $5,000,000 – $100,000 = $4,900,000

In this example, the corporation can pay out $1,900,000 more of corporate assets in tax-free capital dividends than the net cash it received, demonstrating the powerful efficiency of the CDA mechanism.

Part 2: Comparative Analysis of Leveraged Insurance Strategies

An Immediate Financing Arrangement does not exist in a vacuum. To fully appreciate the structure and strategic advantages, it is useful to compare the IFA to other leveraged insurance concepts a client or advisor may encounter in the marketplace. This section provides that context. We will begin by examining a predecessor strategy, the “10-8”, to understand the important lessons that shaped the modern IFA. We will then analyze two contemporary strategies—the Infinite Banking Concept (IBC) and the Insured Retirement Plan (IRP)—to clarify their distinct purposes and mechanics. This comparative analysis will equip you to confidently distinguish between these powerful, but different, financial tools.

Section 2.1: A Lesson from the Past: The “10-8” Strategy and the Evolution of Leveraged Insurance

The story of the modern IFA begins with its predecessor, the “10-8”. This well-known strategy, named for the interest rates often involved, was legislated out of existence in 2013. Understanding the structural flaws that led to its downfall is essential to appreciating why today’s IFA is built on a more robust and sustainable foundation.

The 10-8 Structure

The 10-8 strategy, prominent in the 2000s, derived its name from the interest rates commonly used. Its design eliminated a key risk in other leveraged insurance strategies: the variable spread between the loan rate and the investment crediting rate. The 10-8 solved this by creating a predictable, fixed spread.

The structure used Universal Life (UL). When the client took a loan from the insurer or a related lender at 10%, an equivalent amount of tax-sheltered collateral within the policy was credited with an 8% return. Although this created a 2% negative spread, the strategy’s viability depended on the tax savings from the deductible loan interest. These savings were expected to be large enough to overcome the spread and produce a net profit.

The 10-8 strategy had several defining characteristics, which also proved to be its critical flaws:

• Universal Life Foundation: The structure was built exclusively on UL policies.
• Fixed Spread: Its core mechanic was a fixed, guaranteed spread between the policy’s crediting rate and the loan rate. This created a predictable negative carry, meaning the strategy’s profitability depended entirely on the tax deduction to create a positive return.
• Integrated Lending: The insurance and lending were often provided by the same or related entities. This integration was a notable feature that distinguished it from transactions with third-party, arm’s-length lenders.

The Downfall and Its Lessons

While the strategy was designed to provide certainty, the allure of a seemingly guaranteed positive return led to aggressive marketing, and it was sometimes sold to unsuitable clients. The federal government ultimately viewed the arrangement as an unsustainable tax strategy, concluding its profitability was based on a contrived spread rather than a genuine economic purpose. Consequently, the rules were changed in the 2013 federal budget, effectively shutting down 10-8 strategies.

The Evolution to the Modern IFA

The lessons from the 10-8 era directly informed the structure of the modern IFA, making it fundamentally more robust. The key distinctions are:

• Shift from Universal Life to Whole Life: After tax rule changes in 2017 made Universal Life less favourable for leveraging strategies, the market shifted decisively. Insurers innovated by creating participating whole life policies specifically designed with high early cash values (HECV). With their stable and predictable collateral values, these policies became the new standard for a professionally designed IFA.
• Market-Based Spread: Unlike the 10-8’s engineered negative carry, an IFA operates on a fluctuating, market-based spread. This dynamic relationship with real-world market performance makes the IFA a genuine economic strategy.
• Third-Party, Arm’s-Length Lending: A modern IFA is built on a transparent, commercial relationship with a third-party lending institution. This clear separation between the insurer and the lender reinforces the legitimacy of the arrangement, in contrast to the integrated lending model common in the 10-8 era.

Section 2.2: The Infinite Banking Concept (IBC) vs. The Immediate Financing Arrangement (IFA)

While the IFA is a well-established Canadian strategy, you may also encounter another concept called the Infinite Banking Concept (IBC). While they appear similar in their Canadian application, they stem from different origins and philosophies.

The Great Convergence in Canada

The IBC originated in the US as a philosophy of “becoming your own banker” by using policy loans taken directly from the insurer. However, this core mechanism is penalized in Canada. Under our Income Tax Act, a policy loan becomes taxable income to the policyowner if it exceeds the policy’s Adjusted Cost Basis (ACB). This “ACB tax trap” makes the original US version of IBC unworkable here.

To adapt, Canadian proponents of IBC moved beyond policy loans to use the exact same mechanism as an IFA: a third-party collateral loan from a bank. This means that in practice, the execution of a Canadian-adapted IBC and an IFA is mechanically identical.

The Key Distinction: Philosophy and Institutional Support

Since the mechanics are the same, the true difference lies in the strategy’s intent and support structure:

• The IFA is, at its core, a financing strategy developed in Canada to acquire a large amount of permanent life insurance in a capital-efficient way, typically for estate planning or business succession. It is a well-established strategy with formal support from major Canadian insurers and lending institutions.
• The IBC is, at its core, a philosophy of creating a private pool of capital to finance life’s purchases. The Canadian adaptation, while effective, is a workaround to maintain the original US concept’s goals. It is a practitioner-driven concept rather than one formally supported by major financial institutions.

For most clients, the institutional credibility and direct support from major banks and insurers make the IFA the more transparent and reliable framework for implementing a leveraged insurance strategy in Canada.

Section 2.3: The Insured Retirement Plan (IRP): A Strategy for Tax-Advantaged Income

The Insured Retirement Plan (IRP) is another leveraged insurance strategy that, like the IFA, uses a permanent life insurance policy as collateral for a third-party bank loan. However, its purpose is entirely different. An IRP is not designed for immediate business liquidity or investment accumulation; it is a strategy specifically structured to provide a stream of supplementary, tax-free cash flow during retirement.

The Key Difference: Capitalization of Loan Interest

The defining mechanical feature of an IRP is the treatment of loan interest. In an IFA, the borrower must actively service the loan by making regular interest payments out-of-pocket. In an IRP, the loan is structured so that the interest is not paid by the retiree. Instead, the lender capitalizes the interest, adding it to the growing loan balance. This allows the retiree to receive a tax-free cash flow stream with less management needed than for an IFA. The total loan, including all the capitalized interest, is then repaid from the tax-free death benefit at the end of the retiree’s life, just as with an IFA.

The IFA-to-IRP Transition: A Lifecycle Approach

The IFA and IRP are not competing strategies; rather, they represent two distinct phases in a comprehensive financial plan. They could be implemented sequentially, forming a complete lifecycle approach to wealth management.

• Phase 1: Accumulation (The IFA Years). During their peak earning and working years, the client implements an IFA. They pay premiums, borrow back the capital, reinvest it to grow their business or investment portfolio, and diligently service the loan interest, benefiting from potential tax deductions.
• Phase 2: Decumulation (The IRP Years). Upon reaching retirement (typically age 55 or older, depending on the lender), the strategy could pivot. The client may sell some of the assets that were built using the IFA proceeds to fully repay the outstanding IFA loan. They then immediately re-leverage the same, now mature and cash-rich, life insurance policy with the lender, but this time under an IRP structure. They cease making premium and interest payments and begin to draw a tax-free income stream from the new loan facility, with the interest capitalizing.

This transition represents a sophisticated strategic shift from active wealth accumulation to tax-efficient wealth decumulation, using the same core asset—the permanent life insurance policy—as the engine for both phases.

Section 2.4: Head-to-Head Comparison: IFA vs. Canadian IBC vs. IRP

Part 3: Risk, Due Diligence, and the Role of the Advisory Team

While powerful, the Immediate Financing Arrangement is a complex, long-term leveraging strategy fraught with significant risks. Its successful implementation and management depend on a clear-eyed understanding of these risks and the coordinated expertise of a professional advisory team.

Section 3.1: A Clear-Eyed View of the Risks

Potential clients and their advisors must conduct rigorous due diligence, stress-testing the arrangement against a variety of potential adverse scenarios. The risks span market, credit, regulatory, and personal domains.

Market and Economic Risks

• Interest Rate Risk: IFA loans are almost always structured with a variable interest rate, typically priced as the lender’s Prime Rate plus a spread. A sustained increase in the prime rate will directly increase the borrower’s interest costs.
• Investment Performance Risk: The strategy’s success is contingent on the performance of the asset purchased with the borrowed funds. If the investment underperforms, generates losses, or fails to produce the projected income, the client is still obligated to service the loan interest. This risk is borne entirely by the borrower.

Policy and Insurer Risks

• Dividend Scale Fluctuation: IFAs rely on the insurance company’s whole life dividend scale, which is not guaranteed. If the insurer reduces its dividend scale in the future, the policy’s cash value and death benefit may grow more slowly than projected. This can trigger a collateral call or request for additional collateral from the lender if loan-to-value margins are breached, reduce the final net death benefit, and potentially require out-of-pocket premium payments if the “premium offset” arrangement can no longer be supported by the reduced dividends.

Lender and Credit Risks

• Loan Callability: Although it is uncommon for lenders to call a loan that is in good standing, these lines of credit are technically demand loans. The lender retains the legal right to demand repayment at any time.
• Changing Lender Terms: Lenders often review IFA facilities on an annual basis. They have the right to change their lending policies, increase collateral requirements, or even decide to exit the IFA market altogether. A change in the lender’s appetite for risk could force a client to unexpectedly post more collateral, pay down a portion of the loan, or find a new lender, potentially with less favourable terms.

Regulatory and Tax Risks

• Changes to the Income Tax Act: The tax benefits central to the IFA are based on current legislation. Future governments could amend the ITA, potentially altering the rules for interest deductibility, the collateral insurance deduction, or the tax treatment of life insurance death benefits and the Capital Dividend Account. This legislative risk is inherent in any long-term tax planning strategy.

Personal Financial Risk

• Change in Circumstances: The IFA’s viability depends on the client’s continued financial strength. An unexpected event such as a business downturn, loss of employment, or a long-term disability could severely impair the client’s ability to make the annual premium payments or service the loan interest, placing the entire structure in jeopardy.

Section 3.2: Practical Considerations for Due Diligence

Beyond the high-level risks, successful implementation requires attention to several practical details.

• The Dual Underwriting Hurdle: A candidate must pass two separate underwriting processes: mortality risk with the insurer and credit risk with the lender. Approval from one does not guarantee approval from the other. This adds a layer of execution risk, and it is often best practice for the advisory team to manage these two streams in parallel.
• Lender Relationships: While some financial groups offer both life insurance and lending (e.g., RBC Insurance and RBC Royal Bank), using an independent, third-party lender is often advisable. This ensures the loan terms are market-based and provides a clear, arm’s-length transaction that reinforces the strategy’s integrity.
• Advisor Due Diligence: The quality of advice on a complex strategy like an IFA varies significantly. Red flags in a proposal include:
  • An inability to answer detailed questions clearly and without resorting to jargon.
  • Downplaying or dismissing the inherent risks of leverage.
  • Presenting illustrations that use unrealistic, aggressive assumptions for investment returns or policy performance.
  • A reliance on generic sales materials without demonstrating a deeper, independent analysis of the strategy.

A credible proposal is customized and includes a detailed, balanced discussion of the risks alongside a stress-tested financial model.

Section 3.3: The Professional Advisory Team

Given the complexity, an IFA requires integrated advice from a coordinated team of professionals, each with a distinct and critical role. The greatest risk in an IFA is often not a single market event, but a failure of this advisory team to function cohesively.

• The Insurance Specialist (Taxevity): As the architects of the insurance foundation, our role is to design and implement the core asset that makes the entire IFA strategy possible. We select and structure the permanent life insurance policy to maximize its efficiency as lending collateral. We then build the sophisticated financial models, stress-test the strategy against various scenarios, and quarterback the explanation of the IFA’s mechanics to you and your advisory team.
• The Accountant (CPA): Serves as the guardian of tax compliance. Their role is critical in scrutinizing financial projections, advising on the meticulous tracing of funds required for interest deductibility, and confirming eligibility for the collateral insurance deduction. Post-death, they manage all tax reporting, including the calculation of the Capital Dividend Account (CDA) and the realization of any Surplus CDA Capacity.
• The Wealth Advisor: Often acts as the quarterback for the client’s holistic financial plan, managing the investment of the leveraged loan proceeds. Their role is to ensure the IFA aligns with the client’s overall goals and risk tolerance and that the investment portfolio is structured to meet the income-earning purpose test for tax deductibility.
• The Lawyer: Builds the sound legal architecture for the strategy. This involves reviewing all loan and collateral agreements, drafting the necessary corporate resolutions, and ensuring the ownership and beneficiary structure is correct to prevent unintended tax consequences.

Section 3.4: Concluding Analysis

The Immediate Financing Arrangement is a powerful financial planning tool, but only for the right candidate in the right circumstances. This niche strategy is designed for financially sophisticated, high-net-worth individuals and profitable corporations with a clear, pre-existing reason for both permanent life insurance and immediate capital liquidity.

The IFA’s success is not guaranteed. It is fundamentally an active leveraging strategy that depends the continued favourable treatment under Canadian tax law and the long-term financial stability of the client.

Final Checklist for Proceeding with an IFA:

• Establish the Foundation: Do you have a legitimate, well-documented reason for permanent life insurance (such as estate preservation, business succession, or key-person protection), independent of the desire to leverage?
• Check Affordability: Do you have the financial capacity to pay the insurance premiums and service the loan interest from existing cash flow, even if the leveraged investment strategy were to fail?
• Evaluate Risk Tolerance: Are you, your family, and your business partners genuinely comfortable with the risks of long-term leverage?
• Confirm Understanding: Do you understand the mechanics, risks, and long-term commitments of the IFA well enough to make a considered decision?
• Identify the Use of Funds: Do you have a specific, well-vetted, income-generating investment or business purpose for the borrowed capital?
• Assemble the Team: Have you engaged your independent wealth advisor, accountant, and lawyer to review the proposal collaboratively before signing any binding documents?
• Commit to the Long Term: Do you have the discipline, patience, and long-term perspective required to see this multi-decade strategy through to its conclusion?

A client is in a strong position to proceed only when the answer to all these questions is a definitive “yes.” When executed correctly for the right candidate and with the support of a skilled, coordinated advisory team, the Immediate Financing Arrangement can be an unparalleled tool for enhancing capital efficiency, mitigating taxes, and creating a lasting financial legacy.

Your Next Step: From Theory to Your Portfolio

This guide provides a detailed overview of the Immediate Financing Arrangement, but its true power is only revealed when applied to your specific financial situation. The tax and legal principles are complex, and the optimal structure depends entirely on your unique goals.

The best way to decide if an IFA is the right strategic tool for you is to see it in action. We can build a complimentary, custom-designed model that stress-tests the strategy using your own financial data. This personalized analysis will bring clarity to the numbers, allowing you and your advisory team to make a confident, well-informed decision.

To explore an IFA tailored by Taxevity, schedule a private consultation.

Promod Sharma (FSA, FCIA) and Jeevan Sharma (CFP) YOUR FAMILY TEAM

At Taxevity Insurance, we’re passionate about bringing clarity to complex financial decisions. Let us empower you with personalized strategies to achieve your goals. We focus on life and health insurance solutions to protect your business, your family, and your legacy.