The Canada Revenue Agency (CRA) has issued a stark warning to Canadians about participating in what it calls "aggressive" tax schemes that involve critical illness insurance. The agency cautions that individuals could unknowingly become involved in these complex arrangements and face severe consequences, including substantial penalties, court-imposed fines, and even potential jail time.
How the Complex Tax Scheme Operates
The CRA detailed the mechanics of the problematic scheme in a news release dated December 5, 2025. The arrangements often involve a shareholder borrowing money from a third-party lender, which is frequently connected to the group promoting the scheme. The borrowed funds are then transferred to the shareholder's corporation.
Next, the corporation uses that money to purchase a critical illness insurance policy, typically from an offshore provider. The corporation records the loan as a liability, which in turn allows the shareholder to withdraw funds from the company on a tax-free basis. The CRA notes that the security for the initial loan often cancels the shareholder's obligation to repay it, creating a circular flow of money.
"These arrangements are problematic because they appear to be legitimate insurance transactions, but are actually designed to let shareholders take money from their company without paying taxes," the agency stated.
Serious Compliance and Enforcement Actions
The tax authority has made it clear that it is actively investigating these insurance-based schemes. The CRA warns that participants will be reassessed and denied any tax benefits they have claimed. Furthermore, the agency may apply significant third-party penalties to the promoters and advisors who design and market these plans.
The insurance products at the heart of these schemes often fail to meet the standards of valid policies and exist primarily to support the tax avoidance structure, according to the CRA. The agency has a history of targeting similar plans, having previously issued warnings about offshore disability insurance and leveraged insured annuity arrangements.
How Canadians Can Protect Themselves
To avoid the serious financial and legal risks associated with these schemes, the CRA offers clear guidance. The agency strongly recommends that Canadians seek independent advice from a qualified and reputable tax professional before entering into any complex financial or insurance arrangement.
"Be cautious of any scheme that promises to reduce taxes through complicated insurance or loan structures," the CRA advised. The promise of significant tax savings through convoluted methods is a major red flag.
The CRA also encourages the public to report suspected tax cheating by businesses, charities, or individuals through its official channels. This latest warning underscores the agency's continued focus on shutting down aggressive tax planning strategies that cross the line into illegality.
