What the Honey tax ruling means if your company borrows against a life insurance policy

On 15 September 2026 the Tax Court of Canada released Honey v. The King, 2026 TCC 170. Two brothers owned a manufacturing company. In 2006 each bought a life insurance policy as part of a package the industry called a 10/8. They borrowed at a fixed 10 percent, lent the money to their company, and claimed the interest as a tax deduction. The Canada Revenue Agency (CRA) agreed the money was used in the business. Its objection was the rate. It said 10 percent was not a reasonable rate, allowed 4.18 percent, and refused the rest. The Court agreed, and both brothers lost.

If your corporation owns a policy and a bank has lent against it, this is the case your accountant will ask about. The short answer: the features that sank the Honey deduction are not part of a standard leveraged corporate life insurance plan. The longer answer is more useful. The Court has now said, in plain terms, what you need to be able to prove when an insurance policy and a loan are tied together.

What a 10/8 arrangement was

A 10/8 put two things in one package. The first was a side account inside the policy. It paid a guaranteed 8 percent a year, and that growth was not taxed while it stayed in the policy. The second was a loan at a fixed 10 percent from the same insurance company that issued the policy. So the company paying the 8 percent was the company collecting the 10 percent. The two were tied together by contract. The side account always had to be at least as large as the loan, and the whole policy was pledged to the lender. The 2 percent gap between the two rates was the price of the package. The tax deduction on the full 10 percent was what paid for it.

In Honey the money went in a circle. Each year, each brother took money out of the company, put it into the side account, borrowed the same amount back from the insurer, and lent it straight back to the company.

Here is one round, step by step. The owner puts the loan amount plus 2 percent into the side account. The same day, he borrows the loan amount back at 10 percent and lends it to the company at a fixed rate the judgment does not state. Each year he pays the 10 percent interest in cash and deducts it. The insurer adds 8 percent to the side account, but only as a figure on a statement. The owner cannot take it out, because the account must always cover the loan. So the 8 percent return was really paid out of the owner's own 10 percent. The insurer kept the 2 percent difference without lending a dollar of its own.

One year, in numbers

Here is the same round on a $1,000,000 loan, once as the brothers filed it and once as the CRA reassessed it. The only thing that changes between the two columns is how much of the 10 percent interest counts as a deduction.

As filed, the plan looked like a clear gain: a deductible 10 percent against a tax-free 8 percent. At the rate the Court allowed, the gain all but disappears, and that is before the cost of the insurance itself and before interest on the back taxes.

This table is an illustration, not the brothers' own figures. It uses the three numbers the judgment gives (8 percent credited, 10 percent charged, a deposit of the loan plus 2 percent) and the 4.18 percent the Court upheld. The 45 percent tax rate is an assumption. It leaves out the insurance charges inside the policy, the interest the company paid the owner on his loan to it, the company's own tax position, and the fact that the 8 percent could not be withdrawn while the loan was outstanding. The 2013 federal budget ended 10/8 arrangements, so nothing here can be set up today. It is general information about a court decision, not tax, legal or insurance advice; what a reassessment would mean for any particular owner depends on facts only their accountant and lawyer can assess.

Nobody sells 10/8 plans any more. The 2013 federal budget wrote a definition of a "10/8 policy" into the Income Tax Act and took away the deductions for them. Honey is about the years before that change, so the Court decided it under the general rule for deducting interest, not the 2013 rules. That is why it still matters. The general rule is the one every loan against a policy relies on.

The four tests, and the one that failed

To deduct interest, you have to pass four tests. The Supreme Court of Canada set them out in a 1999 case called Shell Canada. Everyone agreed the brothers passed the first three. The whole case was about the fourth.

How the Court arrived at 4.18 percent

The Supreme Court said in Shell that a rate agreed between an independent lender and borrower in an open market is normally reasonable. The brothers argued that the 10/8 market was that market. Other insurers sold the same 8 and 10 percent pairing, so 10 percent was the going rate.

The judge disagreed. The 8 and 10 percent were fixed parts of an insurance package. No lender had competed for the brothers' business and no one had negotiated the rate. The government's expert said a ten-year, low-risk loan in September 2006 should have cost between 3.5 and 4.5 percent. The CRA's 4.18 percent sat between two public bond rates. The brothers brought no evidence to support anything higher, so 4.18 percent stood.

Three ideas run through the judgment, and each one is a lesson.

1. A rate built into a product is not a market rate. If the loan rate was set to sit 2 percent above a guaranteed policy return, the product designer chose it, not the lending market.
2. Money going in a circle breaks the usual assumption. Shell assumes a real lender taking a real risk. In Honey the lender was never at risk, and the borrower was in effect funding his own loan.
3. It is up to you to prove your rate. Once the CRA said bond rates were the right comparison, it was up to the brothers to show real loans at higher rates. They did not, so 4.18 percent stood.

Why a standard IFA is a different structure

An immediate financing arrangement, or IFA, is what most incorporated owners mean when they say leveraged insurance. It has one thing in common with Honey: a life insurance policy is used as security for a loan, and the interest is deducted. On every point the Court relied on, it is different.

The Court did not say that borrowing against insurance is suspect. It did not refuse the deduction because the money was used for the wrong purpose. It answered one narrow question: was the full 10 percent reasonable, on the evidence in front of it? Unless an appeal changes things, the ruling is about the facts of the 10/8 structure.

What the ruling asks of an owner with a loan against a policy

The lesson is about paperwork, not about redesigning the plan. A well-built IFA already passes the first three tests. Honey is a reminder to be able to prove the fourth. Your file should show:

1. A reason for the insurance that stands on its own. The tax bill on death, the buyout of a partner, or the loss of a key person, written down before the loan was arranged.
2. A bank that did its own checks. The credit approval, the lending limit against the policy, the guarantees it asked for, and its yearly review. A lender that could never say no is the Honey pattern.
3. A rate explained by lending factors. The term sheet showing prime, the spread, and why the spread is what it is: your credit, the security, the size of the loan. Keep the bank's rate history for the loan.
4. No link between the policy's return and the loan rate. The insurer sets the dividend scale for everyone who holds a participating policy. The bank sets the loan rate. Nothing in the file should suggest the two were chosen to fit each other.
5. A clear trail for the money. A separate account for the loan advances and the investments they bought, so anyone can see the money was used to earn income. This was never in dispute in Honey. It should never be in dispute for you.

What a reassessment of the rate would cost

The exposure is easy to size. Say a British Columbia corporation has a $2,000,000 loan against a policy at 4.95 percent. That is a prime rate of 4.45 percent plus a half-point spread. The interest is $99,000 a year, all deducted. If the CRA accepted only 4.18 percent, the allowed interest would fall to $83,600. That leaves $15,400 a year disallowed. At the 27 percent general corporate tax rate, that is $4,158 of extra tax for each year reassessed, plus interest on the arrears. The CRA can normally go back three years. The number is not the point. The point is that a bank's floating rate, set out in a term sheet, is exactly the evidence the Honey brothers did not have. With it, the question should never reach a courtroom.

Assumptions: a prime rate of 4.45 percent and a 0.50 percent spread, typical of Canadian bank lending against participating policies in 2025 and 2026; the British Columbia general corporate rate of 27 percent (15 percent federal plus 12 percent provincial). The 4.18 percent is the rate upheld in Honey for a 2006 loan. It is used here only to show how a partial disallowance works, not as a prediction of what the CRA would allow today.

Where to start

If your corporation already has a loan against a policy, ask your accountant to pull three documents together: the lender's term sheet or credit agreement showing how the rate is set, the bank's credit approval, and the record of where the money went. If you are thinking about an IFA, those same three documents should exist before the first dollar is advanced. Metacap Financial arranges the policy and the bank relationship and works through the file with your accountant and lawyer, so the structure is one a court would see for what it is: a loan from a bank, at a bank's rate, for a business purpose.