File: P2218-1

August 28, 2000

TO: Chief Executive Officers, Federally Regulated Life Insurance Companies and Fraternal Benefit Societies

Subject: Future Income Taxes, Policy Liabilities and the MCCSR Guideline

For fiscal years beginning on or after January 1, 2000, all life insurance enterprises must account for future income taxes on their financial statements in accordance with CICA Handbook Section 3465. The new accounting standard requires that any future tax asset or liability is to be calculated on an undiscounted basis and shown separately on the balance sheet.

Standards of the Canadian Institute of Actuaries (CIA) require that future income taxes attributable to the policy liabilities and to the specific assets supporting those liabilities be taken into account in the policy liabilities of the company. To avoid double counting future income taxes, the policy liabilities are adjusted by the appropriate amount of future income tax asset or liability required to be reported separately on the balance sheet in accordance with CICA Section 3465.

For the purposes of Guideline A - Minimum Continuing Capital and Surplus Requirements (MCCSR) for Life Insurance Companies, the policy liabilities used in calculating negative reserves and cash value deficiencies should include any future income taxes under valuation assumptions as required by CIA Standards. The liabilities, however, are to be calculated prior to any accounting adjustment for balance sheet presentation.

Similarly, the policy liabilities used in calculating the mortality, morbidity, lapse, interest margin pricing, and changes in interest rate environment components of the MCCSR/TAAM should be those as calculated according to CIA Standards prior to any accounting adjustment for balance sheet presentation.

Questions about this new standard should be directed to Mr. David Gourlay - Actuarial Division at (416) 973-8934.

This letter is available in English and French on OSFI's Internet site (http://www.osfi-bsif.gc.ca) under the Publications section or may be obtained by contacting Stéphane Dupel by fax at (613) 952-8219.

Michael Hafeman

Assistant Superintendent
Specialist Support Sector

cc. MCCSR Guideline Holders

Auditors and Actuaries -Federally Regulated Life Insurance Companies and Fraternal Benefit Societies