Immediate Financing Arrangements

For individuals & business solutions.

There are many different ways and strategies for Permanent Insurance contract holders to access their cash surrender values. The Immediate Financing Arrangement (IFA) is a financial strategy that allows policy holders for Universal & Permanent life insurance contracts to benefit from permanent insurance coverage, while having access to the cash required to re-invest in income producing assets or their companies to support the growth of their activities. A participating life insurance that tends to maximize short term cash surrender values, can be particularly advantageous solution for implementing an IFA.

How It Works

The interested person or company purchases a permanent insurance product that meets their needs. It is favoured that the contract holder is the company, and the insured is a shareholder or a key person. The company then pays for the premiums. The cash surrender value accumulates in a tax shelter.

Step 1

The cash surrender value is used as collateral to set up a third party loan or line of credit. The financial institution can then issue a loan to the company of the shareholder/key person.

Step 2

The borrower then chooses to reinvest the cash generated by the loans in the company's current business activities, or in any other eligible commercial project. The borrower pays the loans, and the interest on loans are considered tax deductible. Income is taxed, debt is not…

Step 3

When the insured passes, the death benefit is paid out to the company tax free. The difference between the death benefit and the adjusted cost basis is deposited into the capital dividend account . A portion of the death benefit is typically used to repay the loan.

When the company is the borrower, the loan can be repaid in such a way to create an unused portion of the CDA, which can be used to distribute other assets to the shareholders/key persons estate as a non-taxable capital dividend.

Step 4

Benefits

Tax Savings

Subject to the conditions of the ITA, the interest on the loans is deductible when the loans were incurred for the purpose of earning income.

Tax Sheltered Growth

The annual growth generated by a life insurance policy is not taxable. With these tax savings, the annual growth of a life insurance policy is accelerated compared to other types of investments.

Access to cash

The loans are a source of non-taxable cash for a shareholder/key person. Subject to the conditions of an ITA, the cash received by loans guaranteed by a life insurance policy with an external financial institution are not taxable. Therefore, the IFA provides access to cash with no tax implications.

Passive Income Rules Not Applied

Life insurance policies are not subject to passive income rules. The amounts paid into life insurance policies do not negatively affect the small business deduction (SBD), unlike other types of investments.

Creating a Capital Dividend Account

All or part of the death benefit is disposed into the CDA. The rapid growth of the cash surrender value created by maximizing payments into the life insurance policy helps grow the CDA. The capital dividends paid from the CDA are tax free.

Flexibility

The loans granted to borrowers provide them with the cash they need to carry out their activities while benefiting from permanent insurance protection, and depending on activities, other financial opportunities.