The short answer.
Yes. Some Canadian lenders let you capitalize the interest on an Immediate Financing Arrangement (IFA). The bank uses unused room on the credit facility to pay the monthly interest, so the corporation keeps its cash instead of paying interest out of pocket.
The loan balance grows every month. At death, the corporately owned policy’s death benefit can repay the bank, including the interest that was added. And because the corporation still receives a capital dividend account (CDA) credit on the insurance proceeds, other assets built up inside the company may come out to the family as tax-free capital dividends.[1],[5]
The catch: capitalizing interest only works while the lender keeps approving room. Facilities are usually approved five years at a time and reviewed every year. It is not automatically available for life.
Where these numbers come from. The examples, tables and answers below come from real September 2026 correspondence between GOALD and a private banker at Scotia Wealth Management, published with permission. Personal and client details are removed. This is not an offer, endorsement or credit policy of The Bank of Nova Scotia.
How does capitalizing interest on an IFA loan work?
It’s certainly possible for clients to capitalize on interest to maximize their cash flow.
Essentially, we are using the loan available balance to service the monthly loan interest payment.
If the client initially utilizes $5MM of the available loan, the monthly interest cost would be approximately $17,500, assuming an interest rate of Prime − 0.25% (4.20%).
Since there would still be $400,000 of availability remaining under the credit facility, we could use that amount to service the monthly interest payments. As the interest is funded from the loan facility, the loan balance would gradually increase each month, hence higher interest charges over time.
Private banker, Scotia Wealth Management · September 2026
| Loan details | Amount |
|---|---|
| Approved credit facility | $5,400,000 |
| Initial loan drawn | $5,000,000 |
| Room left for interest | $400,000 |
| Illustrative rate (Prime − 0.25%) | 4.20% |
| First month’s interest | $17,500 |
How the loan balance grows in year one
| Month | Opening balance | Interest added | Ending balance |
|---|---|---|---|
| 1 | $5,000,000 | $17,500 | $5,017,500 |
| 2 | $5,017,500 | $17,561 | $5,035,061 |
| 3 | $5,035,061 | $17,623 | $5,052,683 |
| 4 | $5,052,683 | $17,684 | $5,070,367 |
| 5 | $5,070,367 | $17,746 | $5,088,113 |
| 6 | $5,088,113 | $17,808 | $5,105,921 |
| 7 | $5,105,921 | $17,871 | $5,123,792 |
| 8 | $5,123,792 | $17,933 | $5,141,725 |
| 9 | $5,141,725 | $17,996 | $5,159,721 |
| 10 | $5,159,721 | $18,059 | $5,177,780 |
| 11 | $5,177,780 | $18,122 | $5,195,903 |
| 12 | $5,195,903 | $18,186 | $5,214,088 |
Lender’s original figures, including rounding.
In this example the corporation keeps about $214,088 of cash in year one by not paying the interest itself. The trade-off: the debt is $214,088 higher.
How long can the interest be capitalized before the facility runs out?
This is the question most people skip. The lender was clear:
If the client’s outstanding loan balance exceeds the approved facility amount of $5.4MM, the client would be required to make principal and/or interest payments to bring the balance back within the authorized lending limit.
Private banker, Scotia Wealth Management · September 2026
Running the same math forward, the $400,000 of room lasts about 22 months. The balance passes $5.4M in month 23. After that, the corporation pays interest again unless the lender approves more room, which normally comes from the policy’s cash value growing.
That is why a long-term plan to capitalize interest has to be built around future borrowing room, not just the first approval.
How much will a bank lend against a whole life policy?
We generally structure IFA lending based on the projected Cash Surrender Value (CSV) over the five years according to the policy illustration.
In cases where the client has strong income, liquidity and overall net worth, we may be able to lend up to 100% of the annual premium amount.
That said, the most common structure I see is lending up to 90% of the projected Year 5 CSV, as this generally results in a more flexible debt service requirement.
Private banker, Scotia Wealth Management · September 2026
Two things drive the approval: the policy’s cash surrender value (the collateral) and the client’s income and cash flow, meaning the ability to keep paying premiums and interest.
Five-year IFA illustration from the lender
| Assumption | Value |
|---|---|
| Annual deposit | $1,015,201 |
| Initial death benefit | $20,000,000 |
| Bank loan rate | 5.00% |
| Maximum loan-to-CSV | 95% |
| Corporate tax rate used | 50.67% |
| Dividend scale | Current less 1% |
| Year | Annual deposit | Cash surrender value | Annual loan advance | Outstanding loan | Net cash flow |
|---|---|---|---|---|---|
| 1 | $1,015,201 | $941,071 | $851,446 | $894,018 | ($163,756) |
| 2 | $1,015,201 | $1,976,758 | $915,242 | $1,877,920 | ($99,959) |
| 3 | $1,015,201 | $2,944,533 | $830,433 | $2,797,306 | ($184,768) |
| 4 | $1,015,201 | $4,031,325 | $916,481 | $3,829,759 | ($98,720) |
| 5 | $1,015,201 | $5,067,061 | $846,008 | $4,813,708 | ($169,194) |
Death benefit and CDA in the same illustration
| Year | Total death benefit | Illustrated CDA credit | Net to corporation at death |
|---|---|---|---|
| 1 | $22,380,525 | $21,376,738 | $21,486,508 |
| 2 | $24,837,396 | $22,834,788 | $22,959,476 |
| 3 | $27,354,868 | $24,358,329 | $24,557,562 |
| 4 | $29,862,470 | $25,877,786 | $26,032,712 |
| 5 | $32,343,998 | $27,377,609 | $27,530,290 |
Illustration values, not guaranteed. They include assumptions about interest and collateral insurance deductions that depend on tax eligibility.
How is the IFA credit released each year?
A facility can be approved on projected year-5 cash value, but the bank releases it in steps as premiums are paid and the cash value grows. Using the illustration above, with a facility based on 100% of the year-5 CSV of $5,067,061:
| When | Total credit limit available |
|---|---|
| Year 1 | $941,071 |
| Year 2 (after the anniversary and premium) | $1,976,758 |
| Later years | Released as the cash value grows |
The banker added that, in many cases, clients use the year-1 limit to pay the year-2 premium.
Questions a client asked a Scotia Wealth Management private banker.
A GOALD client planned to keep an IFA running for decades, and possibly start policies for children at age 7 and carry them to 80. We put his questions to the lender. The answers below are close to word for word, lightly edited for readability.
What determines the initial approved IFA loan amount?
Private banker’s answer
The fifth-year cash surrender value (CSV), and the client’s income will determine whether we could apply for 100% or 90% of that value.
As the policy’s cash value increases each year, how is the loan facility increased?
Private banker’s answer
We request our credit funding team to release the funds. We will be asking for an updated policy summary and policy illustration, and an Enquiry 2 form, after the premium is paid.
Is the increase formula-based on lending value, or does the bank reassess income, net worth and debt-service capacity each time?
Private banker’s answer
The increase is mainly based on policy lending value. During the annual review we will ask for income documents as well, but income is not the major factor. From what I have seen, our credit team is more concerned with the client’s ability to pay the premium and loan interest.
Can a larger IFA facility be approved in advance instead of increasing it every year?
Private banker’s answer
We typically apply for five years of CSV. In some rare cases we can go to ten years of value, but that needs strong assets and income.
How long can a bank approve an IFA credit facility for at one time?
Private banker’s answer
Five years would be what I usually propose.
At renewal, does the borrower have to go through full credit underwriting again?
Private banker’s answer
It’s an annual review rather than a full application, so the process is quicker. That said, we still collect updated policy, illustration and income documents for our records.
Could the bank decide not to increase or renew the IFA even if the policy values support the loan?
Private banker’s answer
I haven’t run into this issue, but I am assuming if we are doing an annual review and the client didn’t pay the premium, or we can’t show the client is able to pay the premium, perhaps we would not be able to release the funds.
Will the bank ask for more collateral if the loan is still within the loan-to-CSV ratio?
Private banker’s answer
Case by case, but not really. For 90% of CSV we don’t ask for additional collateral. That said, if we are aiming for 100% of CSV or premium financing, we usually ask for additional assets to be pledged, or for the loan amount to go to wealth management for investment.
One lender’s experience in the circumstances discussed. Not a commitment or a universal credit policy of any institution.
What documents does a bank need to approve an IFA?
For a holding-company structure, the lender asked for more than a standard first approval:
| Area | Documents |
|---|---|
| Insurance | Policy illustration; policy summary if any |
| Corporation | 2 years of holding-company financial statements, full T2 returns and notices of assessment; central securities register |
| Personal | 2 years of full T1 General returns and notices of assessment; personal financial or net-worth statement; investment statements if assets are being pledged |
| Family trust (if any) | 2 years of T3 returns and trust notices of assessment; trust agreement |
What happens to the IFA loan and capitalized interest at death?
The corporately owned policy is assigned to the bank as collateral. At death, the death benefit repays the loan, including the interest that was added over the years. The rest goes to the corporation.
The important part: the corporation’s CDA credit is generally the death benefit less the policy’s adjusted cost basis (ACB), even though part of the proceeds went to the bank under a collateral assignment.[1],[5]
| Hypothetical GOALD example at death | Amount |
|---|---|
| Total death benefit | $10,000,000 |
| IFA loan including capitalized interest | ($7,000,000) |
| Insurance cash left in the company | $3,000,000 |
| Illustrative policy ACB | $800,000 |
| Potential CDA credit | $9,200,000 |
The corporation receives $3M of cash, but may have $9.2M of CDA room. That extra room is what lets assets built up in the company over a lifetime, such as an investment portfolio, come out to the family as tax-free capital dividends, rather than only the leftover insurance cash.[1],[3]
Be precise about what this means. Capitalizing interest does not create or increase the CDA credit. The credit comes from the death benefit less ACB. Capitalizing interest lets the corporation keep its own cash invested during life, while the bank is repaid from the death benefit at death. Paying a capital dividend needs real corporate value and a valid T2054 election, and selling appreciated corporate assets to fund it can still trigger corporate tax.
Can I capitalize the interest on an IFA loan until death?
It can be the goal, but it cannot be assumed. The lender proposes five-year facilities (ten in rare cases), reviews them every year, and releases room as cash value grows. Approval for five or ten years is not a promise to renew forever.
A long-term plan should stress-test rising rates, premium funding, the loan-to-CSV ratio, collateral, and what happens if the corporation has to start paying interest or reduce the loan.
Is capitalized IFA interest tax-deductible in Canada?
It depends on how the borrowed money is used and how the interest is handled.[2]
- Interest that is simply added to the loan balance, without being paid, is generally deductible only when it is actually paid.[4]
- Borrowing a new advance to actually pay interest can be treated differently, and the timing of the deduction can change.[2],[4]
- A portion of the policy cost may qualify as a collateral insurance deduction, subject to strict conditions.[4]
Do not assume interest is deductible because the loan is secured by a corporate policy. Review the credit agreement and the use of funds with your accountant. A bank loan secured by a policy is also legally different from a policy loan from the insurer.
Frequently asked questions.
Yes, if the lender approves it. The lender uses available room on the credit facility to pay the monthly loan interest, so the loan balance grows instead of the corporation paying interest from cash flow. Once the balance reaches the approved facility limit, principal or interest payments are required.
The policy’s projected fifth-year cash surrender value and the client’s income. Income determines whether the lender can apply 100% or 90% of that value.
The lender’s credit funding team releases additional funds after the premium is paid, using an updated policy summary, policy illustration and an Enquiry 2 form.
The increase is mainly based on policy lending value. Income documents are requested at the annual review, but the credit team is mostly concerned with the client’s ability to pay the premium and loan interest.
Five years is typical. In rare cases a lender may approve ten years of value, which needs strong assets and income.
No. The insurance CDA credit is generally the death benefit less the policy’s adjusted cost basis. Capitalizing interest does not change that credit, but because the bank is repaid from the death benefit while the corporation still receives the CDA credit, other corporate assets may be paid out as tax-free capital dividends.
It depends. Interest added to the loan balance without being paid is generally deductible only when it is actually paid. Borrowed money used to pay interest can be treated differently. Confirm the treatment with your accountant.
Is capitalizing interest worth it for your corporation?
It suits incorporated owners with significant retained earnings, strong income and long-term estate goals. The aim is not to borrow the maximum. It is to make one pool of capital do several jobs: stay invested during life, repay the bank at death, and create CDA room for the family.
IFA Modelling
Model my IFA and capitalized interest
We’ll model the premium, cash value, facility size, how long capitalized interest can run, and the projected CDA credit at death for your corporation, then review it with your accountant and lender.
Two steps. Step 2 asks for a phone number so a licensed Goald advisor can confirm your details before anything is modelled. Lending is subject to the lender’s approval.
Continue with the related references.
Sources and disclosure.
Primary sources
- CRA — Income Tax Folio S3-F2-C1, Capital Dividends
- CRA — Income Tax Folio S3-F6-C1, Interest Deductibility
- CRA — Form T2054, Election for a Capital Dividend Under Subsection 83(2)
- Income Tax Act — Section 20 (interest, compound interest and collateral insurance deductions)
- Income Tax Act — Section 89 (definition of capital dividend account)
- Scotia Wealth Management — Private banking
About the examples
The lending examples, tables and eight answers come from private banking correspondence with Scotia Wealth Management dated September 2026, published with permission. Personal and client details are removed and the figures are as provided. The capitalized-interest runway beyond month 12 is a GOALD projection on the lender’s assumptions. The $10 million death-benefit and CDA example is a separate hypothetical GOALD illustration.
Scotia Wealth Management is a trademark of The Bank of Nova Scotia. Goald & Co Financial Inc. is an independent insurance brokerage, is not affiliated with The Bank of Nova Scotia, and does not lend money.
Disclaimer. This guide is educational and general. It is not a financing offer, a lender endorsement, a guarantee of insurance performance, a tax opinion or a commitment to renew financing. Lending is subject to approval; rates, ratios and credit practices change. Illustration values are not guaranteed. Borrowing increases risk. Review any arrangement with the lender and qualified insurance, legal and tax advisors before acting.
Footnote
This publication is protected by copyright. Goald & Co Financial Inc. is not a lender and is not affiliated with The Bank of Nova Scotia. Educational information only. Questions: info@goald.ca.