January 16, 2012
If you are involved in preparing financial reports for corporations or other organizations, certain 2011 tax changes may need to be reflected in your year-end financial statements under International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP).
Only New Brunswick’s 2011 budget proposed changes to the general corporate tax rate, cancelling a scheduled decrease to 8% (from 10%) for 2012. No other federal and provincial budgets proposed changes to the general corporate tax rate. As a result, the following rates are enacted:
The latest general corporate tax rates, as well as rates for Canadian-controlled private companies, are always available on our Canadian Corporate Tax Tables
The chart below provides more information on 2011 federal and provincial corporate tax measures that you may need to reflect in your year-end financial statements. For more information about these changes, contact your KPMG adviser or see the editions of TaxNewsFlash-Canada
noted below. When do new tax measures have to be taken into account?
Under IFRS, the tax effect of changes in tax law and rates is recognized in the period that includes the date that the changes were substantively enacted. Under U.S. GAAP, tax law and rate changes are recognized in the period that includes the date that the changes were enacted.
Finance released draft legislative proposals on July 16, 2010 to implement various income tax technical measures, which appear to be the majority of the items formerly proposed in "Old Bill C-10" in 2007. These measures have been considered substantively enacted for some time for Canadian GAAP purposes, even though Old Bill C-10 died on the Order Paper when Parliament was dissolved for the October 14, 2008 federal election. These measures are also considered substantively enacted for IFRS purposes. However, since these measures are not yet law, they cannot be recognized for U.S. GAAP purposes.
These measures include:
- Changes to the restrictive covenant provisions
- Changes to provisions that apply to the issuance of non-monetary consideration (e.g., shares or options) in section 143.3 of the Income Tax Act
- Updated amendments to reflect previously announced general corporate income tax rate reductions
- Changes to the provisions concerning the rate applied to investment income earned by cooperatives and credit unions
- Draft amendments to the Income Tax Regulations.
Federal tax legislation that has been announced or released in draft form but has not yet reached the bill stage is therefore not substantively enacted or enacted for accounting purposes. This legislation includes certain 2011 foreign affiliate proposals, real estate investment trusts (REIT) proposals and the remaining 2010 federal budget proposals.
Foreign affiliate proposals
Draft legislation was released on August 19, 2011 that replaced a large number of controversial amendments that were announced in 2004 but never passed into law. Among other things, the 200-page package of legislative proposals includes:
- New provisions modelled on the current shareholder benefit rules in subsection 15(2) of the Income Tax Act that apply to loans from a foreign affiliate to a “specified debtor” (i.e., the new “upstream loan” rule)
- A new category of “hybrid surplus” that will include, among other items, 100% of the capital gains and losses that arise on a foreign affiliate’s disposition of shares of another foreign affiliate, a partnership interest and certain financial instruments.
For details, see TaxNewFlash-Canada 2011-24, “Foreign Affiliate Tax Rules Get a Make-Over” and KPMG Webcast: New Rules for Canadian Companies’ Foreign Affiliates.
Specified investment flow-through (SIFT) proposals
Finance introduced proposals on July 20, 2011 in a press release and three-page backgrounder to amend the rules that apply to SIFT entities. The proposals tighten the SIFT rules by restricting the deductibility of payments related to publicly traded stapled securities and by requiring SIFTs to pay instalments monthly instead of quarterly. However, the proposals also provide some relief by expanding the definition of qualifying investor for certain SIFTs and clarifying the meaning of "non-portfolio property".
For details, see the July 28, 2011 Canadian Tax Adviser, “Finance SIFT Proposals Target Stapled Securities”.
Proposals to overturn court decisions
Draft legislation was released on March 16, 2011 that effectively overturns three recent Federal Court of Appeal decisions in favour of the taxpayers. The draft amendments address:
- Non-resident withholding tax on interest payments (Lehigh Cement Ltd v. the Queen)
- Deductibility of contingent amounts (Collins v. the Queen)
- Tax treatment of insurance corporations' policy reserves (The Queen v. National Life Assurance Company of Canada).
Draft income tax legislation was released on December 16, 2010 to amend the provisions relating to the tax treatment of REITs. These rules allow REITS to hold up to 10% of their non-portfolio property as non-qualifying REIT property without losing REIT status and the exemption from tax on specified investment flow-through entities.
For details, see TaxNewsFlash-Canada 2010-41, “Finance Eases REIT Rules”.
2010 federal budget proposals
Draft legislation was released on August 27, 2010 to implement most of the remaining 2010 federal budget proposals. These proposals affect rules related to:
- Foreign investment entities and non-resident trusts (Part 1 of the August 27, 2010 draft legislation)
- Foreign affiliates (Part 2 of the August 27, 2010 draft legislation)
- Information reporting of tax avoidance transactions (a.k.a. the aggressive tax planning rules)
- Foreign tax credit generators (proposed section 91, section 126 and Regulation 5907 of the Income Tax Act and Regulations)
- Loss utilization regarding income trust conversions (proposed subsection 256(7))
- Tax arbitrage opportunities, which extend the specified leasing property rules to property that is leased to a government or other tax-exempt entity, or to a non-resident (proposed Regulation 1100(1.13)).
KPMG’s tax accounting and audit support professionals can help you assess the impact these changes in tax law will have on your organization’s financial statements. We can also help your organization understand and manage your obligations under the Canadian, U.S. and international financial reporting standards for income tax accounts and disclosures. For details, contact your KPMG adviser.
Information is current to January 13, 2012. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
KPMG LLP, the audit, tax and advisory firm (kpmg.ca), a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries.
The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.
KPMG's Canadian web site is located at http://www.kpmg.ca/
© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.