Finance Minister Jim Flaherty's efforts to close tax "loopholes" earlier this year is resulting in a charge for one Canadian insurer.
Royal Bank of Canada's insurance business said Tuesday that it will likely report a charge of about $160-million when the company reports its fourth-quarter earnings. The lender said Thursday that the charge, which drops to $118-million after tax, is the result of proposed federal legislation that would have an impact on policy holders' tax treatment of certain types of individual life-insurance policies.
The changes in question were announced in the federal budget on March 21, when Mr. Flaherty ushered in the end of certain kinds of leveraged life insurance.
This brought an end to so-called "10/8 arrangements," named because policy holders could buy a tax-exempt insurance policy that was guaranteed to grow at a rate of 8 per cent per year, and then borrow against most of that value at an interest rate of 10 per cent, which was tax deductible. The net effect is a subsidized insurance policy for the policy holder.
A bill was tabled in the House of Commons for first reading on Oct. 22. RBC calculated its charge based on current estimates and an assumption that the bill will pass. Any changes will be reflected in the results of the fourth quarter ending Oct. 31, RBC said.
Now that these complicated policies have essentially been wiped out by Finance Minister Jim Flaherty, insurers have to move these client accounts into new insurance products. RBC believes it will be able to move "a substantial portion" of the clients who hold 10/8 policies into new insurance and investment products, but those products will generate slimmer profits.
Since International Financial Reporting Standards (IFRS) Canada makes insurers account for the expected profit of a life insurance policy at the time it is purchased, the company now has to adjust its expectations, and lower its net income accordingly.
"These policies were primarily sold through third-party brokers and RBC is working with them to ensure affected clients understand their choices in light of this proposed legislation," RBC said in a news release.
It's unclear if other companies will announce similar charges. A spokesman for Sun Life Financial Inc. said it only had a small number of these products on its books, but that it had not yet accounted for the changes.
Manulife Financial Corp. declined to comment on whether the company would announce similar charges.
The impact of these changes is unlikely to have any great major significance for the life insurance industry," said John Aiken, Barclays Capital analyst, in a research note Thursday.
"While a modest negative to the quarter, RBC notes that clients will be offered revised options, and the bank expects a substantial portion of existing affected clients to select one of these options," he said.
"Consequently, we anticipate the impact will likely be transitory. There have been no disclosures from the Canadian life companies on this issue, and we would anticipate that any similar charges would likely be immaterial."
RBC's fourth quarter results are scheduled to be unveiled Dec. 5.