File: P2218-1

January 7, 1999

To: Chief Executive Officers
Federally Regulated Canadian Life Insurance Companies

Subject: MCCSR Guideline: Tax Treatment of Net Deferred Gains/Losses Included in Capital

It has come to OSFI's attention that some companies are not correctly calculating the tax adjustment of net deferred gains/losses included in capital. The purpose of this memo is to remind companies that net deferred gains/losses should be tax adjusted according to the MCCSR guideline (page 2-1-1). There are no transitional provisions for the tax adjustment.

For additional information on the correct treatment please refer to:

• OSFI's November 18, 1996 memo reminding companies that any net gains/losses included in capital must take into account tax implications and be adjusted, depending on the tax recognition method used by the company;
• OSFI's October 31, 1997 memo specifying that the tax adjustment applies only to the portion of net gains/losses on which no income taxes had been expensed;
• the footnote added in 1997 to page 20.020 of the OSFI 87 MCCSR Return; and
• Interpretation Bulletin #2 Adjusted Deferred and Unrealized Gains and Losses Included in Capital, dated December 1997, providing an illustration of how to treat tax and disposition costs on deferred net gains/losses.

Should you have any questions, please contact the Relationship Manager assigned to your company.

Nicholas Le Pan
Deputy Superintendent
Supervision

cc: MCCSR Guideline holders