What is an IFA? An Overview for Canadian Business Owners

As a successful Canadian business owner, you are constantly focused on growth and capital efficiency. Every dollar of retained earnings in your corporation represents an opportunity to reinvest in operations, expand into new markets, or acquire key assets. However, you also face the critical need for sound risk management and succession planning, which often requires significant liquidity.

This creates a classic capital dilemma: how do you fund essential long-term strategies like buy-sell agreements or estate planning without tying up corporate capital that could be used for growth today?

What if your corporation could do both? What if it could secure permanent life insurance to protect the future of your business while immediately unlocking an equivalent amount of capital for reinvestment?

This is precisely what an Immediate Financing Arrangement (IFA) is designed to do. An IFA is a sophisticated financial strategy that transforms corporate-owned life insurance from a passive balance sheet item into a dynamic tool for financing growth and enhancing shareholder value.

This guide will explain the IFA in terms tailored to the challenges and opportunities you face as a business owner.

Note: Lenders typically require a minimum loan advance of $50,000 per year and a total loan of at least $500,000 within 10 years. To meet these requirements, your business will typically need to commit to premiums of at least $50,000 per year for 10 years.

What is an Immediate Financing Arrangement (IFA)?

An IFA is a strategy where your corporation uses the cash surrender value (CSV) in a permanent life insurance policy as collateral to secure a loan from a third-party lender. Your corporation then uses those loan proceeds for an eligible, income-producing purpose, such as investment or business operations. When structured and maintained correctly, the loan interest and a portion of the insurance premium may become tax-deductible to the corporation.

An IFA allows your corporate capital to perform a dual function: the original capital grows tax-sheltered inside the life insurance policy, while an equivalent amount of capital, accessed via the loan, is immediately freed up to be put back to work.

For a more technical exploration, see our detailed Foundational Guide to IFAs.

How an IFA Solves Key Business Challenges

How an IFA Works for Your Corporation

1. Qualify and Set Up the Policy: The process begins with underwriting by both the insurer and the lender. Once approved, your corporation purchases a permanent life insurance policy on the life of a key shareholder and pays the first annual premium from its retained earnings, using non-borrowed funds.
2. Pledge the Policy as Collateral: Your corporation formally assigns the policy to a third-party lender as collateral for a corporate line of credit.
3. Secure the Corporate Line of Credit: Because the life insurance policy is highly secure collateral, the lender can provide your corporation with a line of credit for up to 100% of the policy’s cash surrender value. Alternatively, some lenders will provide a loan for 100% of the premium paid, though this may require some additional collateral in the early years.
4. Reinvest the Capital: Your corporation then uses the tax-free loan proceeds to invest back into the business—for expansion, new equipment, or other income-producing activities.
5. Service the Debt: Your corporation pays the monthly interest on the line of credit from its cash flow. The resulting tax deductions can generally be used to reduce the corporation’s overall taxable income.
6. Loan Repayment and Final Distribution: Upon the death of the insured shareholder, the policy’s tax-free death benefit is paid to your corporation. These funds first repay the outstanding loan balance. The significant remainder is credited to the corporation’s Capital Dividend Account (CDA), allowing it to fund the buy-sell agreement or be paid out as a tax-free dividend to the new shareholders (e.g., the deceased’s estate).

Is Your Business a Good Candidate for an IFA?

The IFA is a specialized strategy designed for a specific profile. It is likely a strong fit for your business if you meet several key criteria:

• You have a clear, business-driven reason for permanent life insurance (e.g., funding a shareholder agreement, key person protection, or corporate estate planning).
• Your corporation is consistently profitable with ample cash flow to comfortably service both the annual policy premiums and the monthly loan interest.
• Your corporation has sufficient taxable income to make effective use of the tax deductions generated by the strategy.
• You and your business partners have a long-term vision and a temperament suited for a leveraged strategy.

The Strategic Advantages for Your Business

When structured correctly, a corporate IFA delivers several powerful advantages:

• Maximize Capital at Work: Keep retained earnings deployed in your business operations or other income-generating investments instead of tying them up in passive insurance premiums.
• Tax-Sheltered Growth: The cash value within the life insurance policy—a corporate asset—grows on a tax-sheltered basis, free from annual taxation.
• Potential for Significant Corporate Tax Deductions: The strategy may allow for the deduction of loan interest and a portion of the insurance premiums, which can significantly reduce your corporation’s annual tax bill.
• Enhanced Tax-Efficiency for Shareholders: The Capital Dividend Account (CDA) credit created at death is based on the death benefit less the policy’s Adjusted Cost Basis (ACB), while the cash used to repay the loan is based on the loan balance. Since the ACB is typically lower than the loan balance, this creates Surplus CDA Capacity—a highly efficient way to distribute additional tax-free funds to shareholders.

Risks and Professional Guidance

An IFA is a sophisticated strategy with risks that must be managed, including interest rate fluctuations, business performance, and tax compliance. It requires the active, coordinated collaboration of an expert team. At Taxevity, we act as the architects of the foundational insurance asset. We work in lockstep with your accountant and other advisors to help ensure the IFA is structured correctly and managed effectively over the long term.

To facilitate this collaboration, we have created detailed guides to help your professional team understand their roles:

• You can direct your accountant to our Accountant’s Guide to IFA Due Diligence.
• You can direct your wealth advisor to read our Guide to Integrating IFAs into Wealth Advisory.

A Powerful Tool for Business Succession and Growth

For the right business owner, the Immediate Financing Arrangement is a powerful tool. It transforms life insurance from an expense into a strategic asset that can help you fund your company’s growth, secure its future, and maximize the value you pass on to the next generation.

If this approach to enhancing your company’s capital efficiency and securing its legacy aligns with your goals, the next step is a detailed analysis. Contact us to explore if an IFA is the right strategic move for your business.

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.