00;00;04;24 - 00;00;16;01
Speaker 1
Okay. Welcome back to the Canadian Tax Secrets podcast. This is Rylan Olsen.
00;00;21;18 - 00;00;45;25
Speaker 1
And today I wanted to jump on quick and talk about a concept that a lot of people are talking about recently, which is known as the immediate financing arrangement. Now, for those of you that don't know what the immediate financing arrangement is, it's a strategy involving life insurance, where you purchase a life insurance policy that has cash value associated with it.
00;00;46;00 - 00;01;10;11
Speaker 1
Once that cash value is inside the policy, you can then go to a third party organization and take a loan out against that cash value. So if you put $100,000 in premium into your insurance policy, you can then go to the bank and say, Hey, I want a loan 100% of premium or a percentage of your cash value back out into a loan.
00;01;10;12 - 00;01;48;20
Speaker 1
That loan then can be used for different business purposes or to subsidize lifestyle, whatever the insured person's preference is. But I want to talk about just kind of a nuance when it comes to the IFA and this is something that we've run across recently that just got us thinking a little bit about the effectiveness of an IFA. Now, you as an accountant obviously know when it comes to borrowing money, if you borrow money for the purpose of investing or doing business, then you can deduct the interest on that loan.
00;01;49;06 - 00;02;13;29
Speaker 1
Obviously, with a life insurance policy as collateral, you borrow that money and then invest it or use it, put it back into your business, then you get that deduction. Another cool thing about life insurance is it actually creates another deduction, which is the net cost of pure insurance. So this is a number that's calculated from the insurance carrier and it's basically the pure cost of insurance.
00;02;13;29 - 00;02;41;06
Speaker 1
How much it costs for the insurance that's also deductible. So got me thinking today as I was kind of going over a case that we're working on is a lot of our professionals that are running these type of strategies or business owners that are running these type of strategies, they really are looking at it from a double dipping perspective where they can purchase their insurance, but then the cash flow aspect is not as significant.
00;02;41;06 - 00;03;03;11
Speaker 1
So they're going to commit $100,000 a year to their policy, then they don't actually have to tie up $100,000 a year. They can put $100,000 in, take it back out. Still use that to grow their business and they also create deductions for their business at the same time. But the case that we're working on is actually for a farmer.
00;03;03;25 - 00;03;34;13
Speaker 1
Now, the unique thing about farmers is they don't have the same income tax issues as a professional or a business. So a lot of these strategies will be pitched to business owners and professionals and other high net worth individuals with the idea of, you can come in, you can purchase this insurance, you can create deductions for your corporation, and you can still use the money or double dip with the money.
00;03;34;14 - 00;03;56;28
Speaker 1
The thing that's unique with farmers is most farmers already have enough deductions. Farms that we're working with, if they do have a surplus and new capital at the end of the year, well they go and they purchase a new combine or they buy more land or they buy more cattle and they grow their farming operation so that they can net zero in tax.
00;03;56;29 - 00;04;20;05
Speaker 1
Now, this isn't always the case, but most of the time farmers have a way to reinvest back into their farm year in and year out. Now, one of the main benefits of the IFA is the deductions. But what if you don't need the deductions? Is it still a valid strategy for people to use if you're not going to take advantage of the deductions?
00;04;20;24 - 00;04;44;20
Speaker 1
Got me thinking as that's normally one of the main pain points of people is paying less tax. But when you're dealing with a farm that doesn't pay any tax or can expense a lot of their operations, really it comes down to the ability for them to use their money and not tied up in a life insurance premium. So we have lots of farmers that are trying to equalize their estate.
00;04;44;20 - 00;05;08;13
Speaker 1
They have non farming children and they have farming children. And you know, the farming children are going to take over the farm and the non farming children still need something, right? So life insurance is often used for these farmers to equalize their non farming children. So an IFA still can be a great strategy for a farm because they're able to reinvest that money back into their business.
00;05;08;26 - 00;05;30;15
Speaker 1
But it just got me thinking today about how we need to be making sure as these are being pitched to our clients and to your clients that we really understand, what are we trying to accomplish? The farmer They don't really need the deductions. So are we creating this loan or are we creating this insurance strategy to create deductions?
00;05;30;15 - 00;05;50;19
Speaker 1
Even though the farmer doesn't need deductions or creating it with the purpose of having you know, our cake and eating it too? Or are we just creating this policy that's going to be a headache down the road? It's important that your clients understand what's going on and maybe they don't need the leveraging aspect. Maybe they don't need the loan that's attached.
00;05;50;19 - 00;06;18;07
Speaker 1
Maybe they just need the outcome to equalize for the non farming kids, but they don't actually need the outcome. We're a big proponent. We love the IFA strategy in the right circumstances, with the right people who understand the risks of having leverage, understand interest rate risks. They understand over leveraging with a farm that can be big. Right? When you're trying to expand and you have leverage on the life insurance policy, you have leverage on the land.
00;06;18;29 - 00;06;52;02
Speaker 1
There's risks associated with having too much money and too much money from the bank. And as that interest rate rise, well, now you've either got to collateralize the interest, which then snowballs, and you've either got to be able to come up with the premiums or the interest payments. So there's a lot of moving parts. But today I just wanted to talk about how farmers don't actually need that interest deduction or that NCPI deduction because they already have all of those deductions inside their farming corp already.
00;06;52;02 - 00;07;11;09
Speaker 1
So that's just something that's been on my mind lately of how, you know, farmers are a unique situation. Just need to be looking at these strategies in a different lens. So life insurance is a great asset. It helps equalize the estate for farmers. It can be leveraged if it needs to be. But not all the time is it needed to be leveraged.
00;07;11;09 - 00;07;30;12
Speaker 1
So that's what I've been thinking about lately. Hopefully this helps you in your advisory work with your clients. If you've got any farm clients that have been pitched an IFA I'm curious to know why did they actually go with it? Was it for the deductions? Was it for the cash flow aspect? They don't have to be cash flow.
00;07;30;12 - 00;07;42;01
Speaker 1
They don't have to give up their cash flow and they can continue to reinvest in their business. Just curious what your thoughts are. So anyways, that's my $0.02 for the day. I hope you enjoyed and we'll see you on the next episode.