Do we calculate deferred income tax for Change in Unrealized Capital gain (loss)?
I'm confused.
In Fall 2017, #10, the examiner's report says: "Candidates who treated net deferred income tax (in row N) as a DTA or DTL and did not remove overlapping unrealized capital gains tax already accounted for in net unrealized capital gains were technically incorrect but this was not penalized. However, several candidates’ answers indicated assuming DTA or DTL excluded unrealized capital gains taxes. "
https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(10).pdf
In Fall 2016, #14.a, One of the sample answers is Assuming tax on DTA & DTL = 35%
Policyholder surplus = Prior year surplus + Changes in PHS - change in unrealized gains x 35% = 82000 + 4490 - 35 = 86455
https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(14).pdf
In Fall 2017, #9.a,
Common mistakes included the following: Applying an assumed tax rate (e.g., 35%) to the change in unrealized capital gains.
https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(09).pdf
These answers seem to conflict with each other. So should we calculate deferred income tax to the change in unrealized capital gains or not? Thank you for your answer in advance!
Comments
Actually, I find out that in Fall 2017, #9.a, Sample Answer 5 does calculate the deferred income tax for Change in Unrealized Capital gain (loss) so there is no conflict with these answers. I think that the mistake in the examiner's report means that you should apply (1-35%) not 35%.
I assume that if the question doesn't bring up the deferred income tax, we could just ignore it when we calculate the Change in Unrealized Capital gain (loss). But I am not sure whether we should state this assumption in our answer.
What the examiners were generally looking for was recognition that deferred tax on CUCG was covered in DTA. (And they allowed it if you explicitly assumed otherwise.) If DTA is not among the givens, there is no overlap to mind, so it should be fine to carry on without any assumption.
Given that some sample answers include DTA calculation on change in unrealized capital gains and some do not, should we calculate this? Or maybe a better question is when do we calculate it? A game plan when approached with these types of questions would be helpful, as it is unclear if CAS has historically deducted points for not calculating or for calculating.
If DTA is not given, take it out of the CUCG increment to surplus. If DTA is given, assume that the DTA due to CUCG is included in it, and maybe state this assumption.