Key Question for Canadians
How can you tell if an Immediate Financing Arrangement is a powerful and viable wealth tool?
- What the Loan is For: A common myth is that the loan pays for the insurance itself. In a properly structured IFA, you pay the premiums, and the financing is a separate, third-party loan that uses the policy as collateral to fund an entirely different investment.
- How the Strategy Works: An IFA is not “Infinite Banking”. An IFA uses a third-party collateral loan, which is not a taxable event in Canada. The Infinite Banking concept uses a policy loan, which can be taxable if the loan exceeds the policy’s Adjusted Cost Basis (ACB).
- Why It’s Used: The goal isn’t for the insurance to “beat the market.” The IFA is an estate planning tool designed to create a superior after-tax outcome. It yields a large, tax-free death benefit that solves major liquidity problems, such as unlocking wealth trapped in a private corporation.
The Immediate Financing Arrangement (IFA) is a powerful strategy for wealth management and estate planning that is often surrounded by confusion. Its sophistication is the source of significant, potentially costly, misunderstandings. The concept is similar to using the equity in your home to secure a line of credit for another investment; the IFA applies a similar principle to a permanent life insurance policy, allowing a single asset to perform two jobs at once.
Unlike older leveraged insurance strategies that were targeted by specific legislative changes (see our article on IFA vs. 10-8), the modern IFA is a durable strategy built to work within established, long-standing principles of Canadian tax law.
This article moves beyond the marketing hype to deconstruct three of the most common misconceptions we hear about the IFA, providing a clear framework for you to consider this advanced financial tool.
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The name “Immediate Financing Arrangement” is a common source of confusion. It may seem to imply that the loan is used to pay for the life insurance premiums, which is incorrect and would create significant tax problems.
The mechanical flow of an IFA is strict and non-negotiable:
- You pay the premium first using your own, non-borrowed funds.
- Then, you secure a loan from a third-party lender, using the cash surrender value in your new policy as collateral.
- Finally, you redeploy the borrowed capital into an income-producing investment.
This sequence is critical. Under the Income Tax Act, interest on money borrowed to pay life insurance premiums is not deductible. By paying the premiums yourself and then borrowing against the policy’s value to invest, you create the opportunity for the loan interest to be deductible, provided you meet the “purpose test”. The financing isn’t for the premium; it’s for your next investment.
Misconception 2: Conventional investing delivers better returns.
This is perhaps the most common objection, particularly from those focused purely on investment performance. The argument is that the returns from conventional investing will outperform the growth inside an insurance policy. This comparison is flawed because it ignores the impact of tax.
For estate planning, the most important metric isn’t the pre-tax rate of return percentage; it’s the after-tax dollars that your heirs will ultimately receive.
Conventional investments face a double tax drag: annual taxation on growth and a final, significant tax liability on capital gains at death due to deemed disposition. In contrast, the investment growth inside life insurance is tax-sheltered and the death benefit is tax-free. An IFA allows you to benefit from both worlds: you can continue to pursue growth in your conventional investment portfolio while using the insurance policy as a tool to create a large, tax-free lump sum for your estate, which can be used to unlock trapped corporate wealth.
The goal of an IFA isn’t for the insurance to “beat the market”. It’s to create a more tax-efficient outcome for your estate, ensuring your heirs receive more of your wealth after all taxes have been paid.
Misconception 3: “Infinite Banking” is better.
A great deal of online content promotes the concept of “Infinite Banking,” where you can supposedly “Be Your Own Banker”. This can lead to the perception that it’s better than an IFA. In Canada, Infinite Banking has a major tax flaw that gets downplayed or ignored.
The imported-from-America Infinite Banking concept involves taking a policy loan directly from the insurance company, which offers the appeal of automatic approval. However, in Canada, a policy loan is treated as a policy disposition. If the loan exceeds the policy’s Adjusted Cost Basis (ACB), the difference is immediately taxable as income. This tax trap becomes more acute over time, as the policy’s ACB is reduced by the annual cost of insurance and can eventually become zero, making the entire loan taxable.
A made-in-Canada IFA, in contrast, uses a collateral loan from a third-party lender. This requires formal lender approval, but it is not a taxable event. This structure is specifically designed to work within Canadian tax law, avoiding the ACB tax trap and creating the opportunity for tax-deductible interest.
| Feature | Made-in-Canada IFA | Infinite Banking (in Canada) |
| Loan Type | Collateral Loan | Policy Loan |
| Loan Source | Third-Party Lender | Insurance Company |
| Tax Event? | No | Yes, if loan exceeds ACB |
| Interest | Potentially Deductible | Not Deductible |
For a detailed comparison, see our article, IFA vs. Infinite Banking: A Made-in-Canada Clarification.
From Misconception to Clarity
With a clear understanding of IFAs, you can better evaluate how they apply to your own situation. The question isn’t just whether an IFA is a good strategy, but whether it’s the right strategy for you. To explore if you are a suitable candidate, find out why an IFA isn’t for everyone and if you have the right mindset for a leveraged strategy.
When you’re ready, schedule a chat to get an IFA modeled for you.
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.
