Transcript Slide 1

TAX
Accounting for Income Tax:
Implications of the Proposed
SIFT Rules
June 2007
KPMG LLP
June 2007
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
1
Agenda
 Overview of proposed SIFT rules
 SIFT imposes “income tax”
 Pre-SIFT legislation
 Substantive enactment
 Accounting implications
 Period to book impact of change in tax law
 Calculation of future tax assets/liabilities
 Reporting impact on future tax assets/liabilities
 Impact on subsidiary trusts and partnerships
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
2
Overview
 Bill C-52 contains the proposed legislation
that will subject distributions from certain
trusts and partnerships (“SIFT”) to a tax at
a rate similar to the corporate tax rate
 The distributions for trusts that existed on
October 31, 2006 will be subject to tax for
taxation years ending after 2010 or earlier
if certain growth guidelines are exceeded
 Trusts formed after October 31, 2006 will
be subject to the distribution tax for its first
taxation year ending after 2006
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
3
SIFT Tax is “Income Tax”
 SIFT tax is an “income tax”
 The accounting falls under CICA Handbook
Section 3465 - Income Taxes
 The proposals are not a “tax on distributions”
of SIFTs that would not be subject to CICA
3465
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
4
Pre-SIFT Proposed Legislation
 Most SIFT trusts historically met the
conditions of EIC 107 and are exempt from
recognizing its future income tax assets
and liabilities
 As a result of Bill C-52, a SIFT trust will no
longer be exempt as its distributions will
effectively no longer be deductible for tax
purposes and therefore will not effectively
be an exemption from income taxes (current
or future)
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
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Substantive Enactment
 Because proposed SIFT rules is a proposed change to
“income tax legislation”, rules in CICA 3465 and EIC 111
regarding “substantively enacted” changes in tax
legislation and tax rates applies
 In accordance with EIC 111, where there is a minority
government, the legislation is substantially enacted for
Canadian GAAP when it has passed third reading in the
House of Commons
 Bill C-52 passed third reading on June 12, 2007 →
considered “substantively enacted” as of that date
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
6
Impact of Change in Tax Law
 Effect of changes in tax laws or rates is reflected in the
period that includes the substantive enactment date,
even though the changes may not be effective until
future periods
 First reporting date after June 12, 2007 [for calendar year end
companies, for the second quarter ended June 30, 2007]
 Impact is reported prospectively (i.e., prior period financial
statements not restated for this change)
 Cumulative impact of recording future income taxes
for SIFT legislation as at 6/12/2007 is NOT factored
into estimated effective tax rate
 Charged to income tax expense as lump sum in the quarter that
includes 6/12/2007
 Except for estimated impact on the 2007 current income tax
liability and future income taxes relating to temporary differences
that will originate or reverse subsequent to 6/12/2007
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
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Calculation of Future Tax Assets
and Liabilities
 In accordance with 3465, SIFT has to:
 Determine its “tax status” at each balance sheet
reporting date
 Determine its “temporary differences” as of the
date of substantive enactment of the proposed
legislation
 Determine the expected time period(s) over which
those temporary differences are expected to reverse
 Apply the income tax rates expected to apply in the
period(s) in which those temporary differences are
expected to reverse, using income tax rates that
have been substantively enacted as of the date of
the substantive enactment of the proposed
legislation
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
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Calculation of Future Tax Assets
and Liabilities
 Require “scheduling” the reversal of the temporary
differences
 At least two time periods → those that are expected to
reverse prior to December 31, 2011 (for a calendar year
SIFT) and those that are expected to reverse thereafter
 Usually a tax rate of NIL for 4-year period to 2011 and
then rate applicable to SIFTs for period thereafter
 This approach and use of tax rate of NIL through 2010
assumes SIFT qualifies under EIC 107 to account for
income taxes through to end of 2010 as if it was
“exempt” from income taxes; otherwise, SIFT would
use full SIFT and/or trust tax rates for all temporary
differences that will reverse after June 12, 2007
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
9
Income Tax Rate Expected to Apply
 Future reorganizations proposed by management which
may result in a tax rate different from the SIFT tax rate
should not be considered until the reporting period that
such reorganization occurs
 For example, for some SIFT trusts, the corporate tax rate
may be lower than the SIFT tax rate (i.e., provincial tax
rate differences) and the SIFT may ultimately reorganize
as a corporation
 In this situation, the change in the tax rate as a result of
the reorganization is a future tax recovery or expense in
that period
 The SIFT should also consider whether the conversion
will result in a change of control for accounting purposes
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
10
Reporting Impact
 The net future tax asset or liability will result
in a current period future tax recovery or
expense and not an adjustment to equity
 In situations where the asset or liability of
the SIFT was previously acquired in a
business combination, which results in a
temporary difference, no adjustment to the
original purchase price should be made
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
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Subsidiary Trust/Partnership
 In many cases the SIFT (i.e., the public trust) will have
investments in subsidiary trusts and partnerships
 If these subsidiaries are not subject to the SIFT tax on
distributions then no future tax asset or liability should
be set-up for the temporary differences of those entities
at the subsidiary level → assuming EIC 107 exemption
still applies
 The SIFT should set-up the “outside basis” temporary
differences of the subsidiaries in the same manner that
a corporation would account for the temporary
differences of such entities
 CICA 3465.37 exemption not available
 Consider periods over which sub-trust’s “inside
basis” temporary differences will reverse
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
a Swiss cooperative. All rights reserved.
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KPMG Contacts
Name
Telephone
Email
Jodi Roworth
691-8092
[email protected]
Chris Post
691-8434
[email protected]
John Gordon
691-8118
[email protected]
Rick Whitley
691-8216
[email protected]
.
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© 2004 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada on recycled paper.