The federal budget, released last Thursday, unveiled the final decision on how Canada’s tax code will incorporate IFRS 17, a complex new global accounting standard for the insurance industry. In progress for years, the new accounting rules will enter into force in 2023. The government has said it will adopt the changes wholesale – in addition to an accounting rule that would allow life insurance companies to recognize certain profits and therefore pay taxes on them for many years. Instead, the government wants insurers to pay taxes in advance when insurance contracts are signed. That would generate an additional $ 2.35 billion in federal revenue over the next five years, the government estimates. Insurers say provincial corporate taxes could add an additional $ 2 billion over the same period. The additional cost for insurers will add to a new one-off tax on the profits of Canada’s largest banks and insurance companies, as well as a permanent increase in their annual corporate tax rates, reported last week in the budget. That’s expected to cost $ 6.1 million over the next five years, though the blow is less severe than originally predicted by the Liberals last fall. Discussions about whether taxable profits will be recognized for many years over a down payment can usually be relegated to academic tax journals or to accountant client sheets. However, the government’s decision – as well as being telegraphed through consultations with the industry last year – appears to add to the injury, insurers say. Stephen Frank, chief executive of the Canadian Life and Health Insurance Association (CLHIA), said his team urged the Treasury Department in 2021 not to reject the accounting rule and was “surprised and disappointed” when it learned last week that it had failed to convince the government. “This puts Canada offside to any other jurisdiction in the world,” he told The Globe and Mail on Monday. “Companies will have to finance this tax liability in some way and I’m not sure how it will work. So we are disappointed with the direction they have taken here. “ The federal budget envisions $ 56 billion in new spending, higher taxes as critics fear it will fuel inflation. Ottawa tax on banks and life insurance companies will provide $ 6.1 billion in five years, 40 percent less than the Liberals’ campaign commitment What the government has done, however, is not so much creating a new tax as failing to extend a tax deferral benefit to insurers that would result from the new accounting rules, accountants and analysts say. In general, current accounting rules, as well as Canadian tax rules, allow for the recognition of losses and gains when signing long-term insurance policies. The government’s view, as highlighted in its request for comment published last year, is that IFRS 17, if adopted for tax purposes without change, “will introduce an asymmetric treatment of profits and losses, as only profits will be deferred through [new rules]. » Insurers will continue to recognize expected losses in advance for tax purposes, the finance ministry says. If the government did not reject this part of the new IFRS standard, “profits from insurance policies – both new and existing at the time of the transition – would no longer be in line with the economic activity schedule.” . The industry strongly disagrees with this claim. In its submission to the government last year, CLHIA said deferred earnings have not yet been collected by the insurer, but the new rules will tax them as if they were. “The government’s proposal … presupposes that all” economic (income) activities “are performed at the beginning of the insurance contract. “CLHIA respects with respect.” CHLIA says it surveyed companies that account for 85 percent of insurance business in Canada and more than two-thirds said they would see “a significant increase in taxable income in fiscal year 2023.” In a briefing to clients, Osler law firm Hoskin & Harcourt LLP said that “budget materials unjustifiably suggest that deferral of unearned profits is ‘unjustified’ and that 90 per cent of the insurer’s ‘core financial activities’ under a long-term insurance contract (often lasting more than 20 years) arises at the time of the award of the contract. “ Nigel D’Souza, stock analyst at Veritas Investment Research, says that “income tax accounting after IFRS 17 will be similar to income tax accounting before IFRS 17. Therefore, if they did not make this change, tax revenue it would be lower. “ “I think what comes to the fore is… what is the rationale that justifies the variation between a financial report and a tax report?” said Mr. D’Souza. “In this case, too, it is justified in order to maintain consistency. And for me that makes sense. “ Your time is precious. Deliver the Top Business Headlines newsletter to your inbox in the morning or evening. Register today.
