Canada Revenue Agency warned taxpayers about aggressive tax schemes involving insurance products.
The warning focused on certain arrangements involving critical-illness insurance that may be designed to avoid tax.
CRA said the arrangements often involve complex transactions, such as borrowing money and using the borrowed funds to pay for insurance.
A common structure involves a shareholder borrowing from a third-party lender connected to a promoter group, transferring the borrowed funds to a corporation, and having the corporation buy a critical-illness insurance policy, often from an offshore provider.
The corporation records the shareholder loan as a liability, allowing the shareholder to withdraw funds tax-free. CRA said the security for the loan can cancel the shareholder's obligation to repay it, creating a circular flow of funds.
The agency said these arrangements may appear to be legitimate insurance transactions but are designed to let shareholders take money from a corporation without paying tax.
CRA also said the insurance products used in these arrangements often do not meet the standards of valid insurance policies and are used to support the tax scheme.
Participants can face reassessments, denial of tax benefits, penalties, court fines, and possible jail time. CRA said it may also apply third-party penalties to promoters and advisors.
The warning is important because it names a specific planning pattern: insurance, loans, offshore providers, and circular cash flows used to extract corporate funds. Taxpayers who entered such an arrangement may need to correct their tax affairs through the Voluntary Disclosures Program if eligible.