Widening the income tax gap…

This article was originally posted on June 21, 2011 by

Certain insurance companies are selling a financial concept that will deprived tax payers of billions of dollars in income taxes. While all level of governments whether it be provincial or federal are cutting their spending in order to reduce their deficits, the very rich and the very affluent are able through this strategy to reduce and avoid paying income taxes at a compounded rate of 10% every year until they die.

 The Strategy:

 The product used in this strategy was discussed by me in the text:


 In this text, I explained that with this product someone must lose in order for someone to win. Will it be the policyholder or the insurance company? With this strategy, insurance companies have resolved this problem by transferring the loss to the tax payer while guaranteeing their profit margins. This strategy is referred as the 10-8 leveraging arrangement. The concept is surprisingly simple.

 The insurer promises to credit a guaranteed rate of return of 8% on the insurance policy. You would think this is impossible as it would be financially suicidal. The catch is that the policyholder must borrow against the cash values of the policy at a guaranteed borrowing rate of 10% paid to the insurer. Therefore the insurer’s rate of profit is 2%.

 Why would a rich individual enter such an arrangement? Why would they borrow at 10%? This is because the loans will be reinvested in such a way to make the interest on these loans deductible against taxable income. As a result, the net cost of borrowing is 5%. The profit to the customers is therefore 3% (8% returns less 5%). This concept is explained on this site:


 Who is going to lose?

 The tax payers and the Canadian society are the losing parties of this arrangement. At 10%, one $1,000,000 dollars loan will grow to more than $6 million in 20 years allowing the very rich policyholder to reduce his taxable income by more than $600,000 in that year alone. Over this period of 20 years, the tax payer would end up losing more than $2.5 million in income taxes for this one policy. Considering the success of the insurance industry in selling this concept, we are talking about a loss of several billions of dollars in tax revenues into the future.

 What is the Revenue Canada’s position?

 Revenue Canada (RCA) has voiced its concerns towards this strategy in 2008 and in prior years. This strategy would represent tax avoidance. However, RCA has still not audited any cases involving the use of this strategy.

 It is expected that insurers and accounting firms will marshaled their large financial resources in order to protect the use of this strategy. Is RCA afraid to confront these powerful interests? Or is RCA refusing to do an audit because it would uncover something more sinister?


 In the end, the rich policyholder is only paying an inflated loan rate to increase the deductible interest against his taxable income. This decision serves no other business purposes. This is tax avoidance. In our society where the number of poor children going hungry and without a meal every day increases, where the budget of our schools are cut, teachers fired, where seniors have to do with less, where shelters are closed, where heath care is under financial pressure, can we as Canadian sleep soundly at night knowing that those who are rich will be able to decrease their taxable income by 10% this year, 10% the year after, 10% the year after this…? Until the widening of the income tax gap between the poor and the rich has forever changed the foundation of our Canadian society.



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