20 May 2011 Roundtable, 2011-0399761C6 - CLHIA #3 - IFRS and Life Insurers

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. How is the adjustment to retained earnings resulting from the change in accounting for term certain annuities under IFRS treated for tax purposes?
2. Can the CRA confirm that subsection 138(17.1) should be applied to subsections 138(16) and (17) to determine the referenced amounts and whether subsection 138(18) or (19) applies?

Position: 1. The adjustment is to be included or deducted in computing income in the first year in which the taxpayer uses IFRS pursuant to subsection 9(1).
2. Yes.

Reasons: 1. Consistent with the CRA's general position. It is our view that the adjustment to retained earnings as a result of the adoption of IFRS treatment for term certain annuities should be reported in the first year in which IFRS is used.
2. In our view, subsection 138(17.1) should be applied to determine whether subsection 138(16) or (17) would have applied without reference to excluded policies for the purpose of determining whether subsection 138(18) or (19) applies.

CLHIA Roundtable - May 2011
Question 3 - IFRS and Life Insurers

a) Term Certain Annuities

Under IFRS, term certain annuities with no mortality uncertainty are considered investment contracts and recorded as investment contract liabilities rather than insurance contracts, which are recorded as actuarial liabilities. Investment contracts will be accounted for using deposit accounting under IFRS, which differs from the insurance accounting followed under Canadian GAAP. Assuming that an insurer's fiscal year is on a calendar year basis, this change in accounting may result in a difference between the actuarial liability balance reported for December 31, 2010 under Canadian GAAP and the amount as restated as an investment contract liability balance at January 1, 2011. For accounting purposes, this difference is to be recorded as an adjustment to retained earnings as part of the adoption of IFRS. Amendments to the insurance tax rules enacted in December 2010 do not address this difference.

Question:

Can the CRA confirm how the difference between the actuarial liability balance at December 31, 2010 under previous Canadian GAAP, and the investment contract liability balance at January 1, 2011 under IFRS, should be treated for tax purposes?

CRA Response:

It is the CRA's general view that in circumstances where a change in accounting policy is warranted, the necessary adjustments to income resulting from the change in accounting policy should be made to the taxpayer's income for the first year in which the new accounting method is applied pursuant to subsection 9(1). Where accounting adjustments as a result of conversion from GAAP to IFRS are made to retained earnings, such adjustments should, in our view, be considered in determining taxable income in the first year in which the taxpayer uses IFRS.

As stated in Income Tax Technical News No. 42, first time adopters of IFRS may need to make adjustments on Schedule 1 of a T2 return to ensure that all revenues and expenses are fully reported, and reported only once. In the situation described, the CRA would expect that the difference between the actuarial liability balance reported for December 31, 2010 under Canadian GAAP and the amount restated as an investment contract liability balance at January 1, 2011 under IFRS, that is recorded as an adjustment to retained earnings, be included or deducted in computing income in the 2011 year.

b) Transitional Rules

The amendments to the insurance tax rules enacted in December 2010 include the addition of subsection 138(17.1) which states, in part, as follows:

(17.1) In applying subsections (18) and (19) to a life insurer for a taxation year of the life insurer in respect of the International Financial Reporting Standards adopted by the Accounting Standards Board and effective as of January 1, 2011,
(a) the reference to "policy reserve" in B of the formula in the definition "reserve transition amount" in subsection (12) is to be read as a reference to "policy reserve determined without reference to the life insurer's excluded policies";

Subsections 138(18) and (19) referred to in subsection 138(17.1) look to subsections 138(16) and (17) to determine if there is an amount included or deducted in computing the insurer's income for the transition year. For these rules to work properly, in determining the transition adjustment under subsection 138(18) or (19), subsection 138(17.1) must first be applied to subsections 138(16) and (17) to redetermine the inclusion or deduction without reference to the life insurer's excluded policies for the purpose of determining the transition adjustment under subsection 138(18) or (19).

Question:

Can the CRA confirm that subsection 138(17.1) should be applied to subsections 138(16) and (17) to determine the referenced amounts and whether subsection 138(18) or (19) applies? In other words, although subsection 138(17.1) does not explicitly reference subsections 138(16) and (17), the redetermination of the reserve transition amount without reference to the life insurer's excluded policies must be computed for the intended result under subsection 138(18) or (19).

CRA Response:

Subsection 138(17.1) ensures that a life insurer's reserve transition amount to be amortized pursuant to subsection 138(18) or (19) is calculated without reference to excluded policies, as defined in subsection 138(12).

The CRA confirms that when determining whether subsection 138(18) or (19) applies, subsection 138(17.1) should be applied to redetermine the inclusion or deduction referred to in subsections 138(16) and (17) such that the life insurer's excluded policies are ignored in computing such inclusion or deduction. As a result, the life insurer will be entitled to a transition deduction adjustment pursuant to subsection 138(18) if there would have been an income inclusion pursuant to subsection 138(16) in the transition year had the reserve transition amount been calculated without reference to the life insurer's excluded policies. Conversely, the life insurer will have a transition income adjustment under subsection 138(19) if there would have been a deduction pursuant to subsection 138(17) in the transition year had the reserve transition amount been calculated without reference to the life insurer's excluded policies.

Terry Young
2011-039976