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Tax Accounting Update — Finance Clears the Slate 



Tax Accounting Update — Finance Clears the Slate

November 22, 2012
No. 2012-39

 

The federal government recently tabled two major tax bills in the House of Commons containing more than 1,300 pages of tax amendments. Bill C-45, presented in October 2012, contains most of the 2012 federal budget measures and Bill C-48, tabled on November 21, 2012, contains a large backlog of outstanding tax legislative amendments, some going as far back as 2002. To help you keep track of the substantively enacted dates for these tax measures for IFRS and Canadian Accounting Standards for Private Enterprise (ASPE) purposes, we have prepared a summary table featured below.

 

Generally, for financial statements with a period ending on or after the date of substantive enactment (i.e., October 18, 2012 or November 21, 2012), current and deferred tax assets and liabilities will reflect the impact of these tax measures. For example, a corporation with a December 31, 2012 year-end that reports in accordance with IFRS or ASPE will reflect all of the measures included in the two tax bills. However, a corporation with a September 30, 2012 year-end will not reflect any of the measures, except to the extent that certain measures may have already been considered to be substantively enacted.

 

While these tax measures cannot be reflected in the tax provision, or current or deferred tax balances recorded in the financial statements before the date of substantive enactment, you may want to consider whether there needs to be any disclosure in the notes to the financial statements, such as disclosures that may be necessary in accordance with IFRS-IAS 10, Events After the Reporting Period, or under the other accounting frameworks. You may also want to consider disclosures in other documents, such as Management’s Discussion and Analysis (MD&A).

 

While the measures in contained in Bill C-45 and Bill C-48 are considered to be substantively enacted for IFRS and ASPE purposes, it is important to note that they will not be considered enacted for purposes of U.S. GAAP until the bills are passed through Parliament and receive Royal Assent.

 

Bill C-45 — 2012 Federal Budget Measures

 

The tax measures contained in Bill C-45 are considered substantively enacted for IFRS and ASPE purposes on October 18, 2012, when the bill received first reading in the House of Commons. Bill C-45 implements the 2012 federal budget measures including changes to the Scientific Research and Experimental Development (SR&ED) program, foreign affiliate dumping, thin capitalization, and section 88 bump denial limits for partnerships.

 

See below for a handy summary table that highlights the federal tax legislation contained in Bill C-45 and when these corporate, international and personal tax measures are considered to be substantively enacted for purposes of IFRS and ASPE.

 

Bill C-45 - 2012 Federal Budget Measures Tax Accounting Date of Substantive Enactment
International Taxation  

Foreign affiliate dumping rules that:

 

  • Curtail the use of Canada’s foreign affiliate system where the relevant Canadian company is controlled by a non-resident corporation.
  • Introduce the definition of a “pertinent loan or indebtedness” to provide an imputed interest income inclusion exception to the foreign affiliate dumping rules.
October 18, 2012

New thin capitalization rules to restrict interest deduction, including:

 

  • A reduction in the debt-to-equity ratio to 1.5 to 1 (from 2 to 1)
  • An extension of the regime to partnership debt
  • A new deemed dividend rule for excess interest expense.

 

See TaxNewsFlash-Canada 2012-27, “Time Running Thin for “Thin Cap” Planning?”, dated October 25, 2012.

October 18, 2012
Transfer pricing — Changes to ensure transfer pricing secondary adjustments are treated as dividends for Part XIII withholding tax purposes. October 18, 2012
Corporate Tax  

General changes to the SR&ED program including:

 

  • Reduction of the general SR&ED investment tax credit rate to 15% (from 20%)
  • Reduction of the prescribed proxy amount, which taxpayers use to claim SR&ED overhead expenditures, to 55% of the salaries and wages of employees who are engaged in SR&ED activities (from 65%)
  • Removal of the profit element from arm’s-length third-party contracts for the purpose of the calculation of SR&ED tax credits
  • Removal of capital from the base of eligible expenditures for the purpose of the calculation of SR&ED tax incentives.

 

See TaxNewsFlash-Canada 2012-33, “Are You Ready for the New R&D Regime?”, dated October 25, 2012.

October 18, 2012

Partnership restrictions to prevent the avoidance of corporate income tax through the use of partnerships to convert income gains into capital gains, such as:

 

  • Elimination of section 88 “bump” for partnership interests
  • Taxation of certain partnership interests sold to non-residents.
October 18, 2012
Phasing out of the Corporate Mineral Exploration and Development Tax Credit. October 18, 2012
Atlantic Investment Tax Credit — Changes to eligibility October 18, 2012
Capital cost allowance — Changes to the eligibility for the accelerated capital cost allowance for clean energy generation equipment to include a broader range of bioenergy equipment. October 18, 2012
Personal Tax  

RCA arrangements — Amendments to the rules applicable to retirement compensation arrangements (RCA), including:

 

  • New prohibited investment and advantage rules to directly prevent RCAs from engaging in non-arm’s length transactions
  • New restrictions on RCA refunds in circumstances where the RCA’s property has lost value.
October 18, 2012
Employee Profit Sharing Plans (EPSP) — Tax a “specified employee” (an employee that has a significant interest in an employer or does not deal at arm’s length with the employer) on “excess” contributions at the combined top marginal tax rate. October 18, 2012

 

Bill C-48 — Catch-Up Tax Technical Amendments

 

Finance first released a detailed 950-page Notice of Ways and Means Motion on October 24, 2012 that consolidated almost all outstanding tax measures that Finance released since 2002 related to foreign affiliates, non-resident trusts, real estate investment trusts (REIT), and many more general technical amendments to hundreds of sections of the Act, including two mini-technical bills. These tax measures were formally tabled in Bill C-48 and became substantively enacted for IFRS and ASPE purposes on November 21, 2012 when Bill C-48 received first reading in the House of Commons.

 

Here's a handy summary table of the foreign affiliate, non-resident trust and foreign investment entity, REIT, and general tax measures contained in Bill C-48 and when these measures are considered to be substantively enacted for purposes of IFRS and ASPE.

 

Bill C-48 —Catch-Up Tax Technical Amendments Tax Accounting Date of Substantive Enactment
Foreign Affiliates  

August 27, 2010 (Part 2) draft legislation (initially released December 18, 2009), including:

 

  • Extending the deadline to revoke many foreign affiliate elections, including the recharacterization rule for acquisition financing election (“Cap D election”).
November 21, 2012

August 19, 2011 draft legislation replacing a large number of controversial draft amendments that were announced in 2004, and now includes:

 

  • Upstream loans from a foreign affiliate
  • Hybrid surplus rules.
November 21, 2012
Non-Resident Trusts (NRT) and Foreign Investment Entities (FIE)  

August 27, 2010 (Part 1) draft legislation including:

 

  • 2010 federal budget modifications to previous draft legislation.
November 21, 2012
Real Estate Investment Trusts (REIT)  
December 16, 2010 draft legislation to amend various provisions regarding the tax status and treatment of REITs. November 21, 2012
General Tax Measures  

July 16, 2010 draft legislation — “Old Bill C-10” measures, including:

 

  • Restrictive covenant provisions
  • Expenditure limitations for the issuance of certain non-monetary compensation (e.g., shares or options).
  • Amendments to change the factor in the paragraph 110(1)(k) deduction for Part VI.I tax for years ending before 2010.
June 15, 2007*

July 16, 2010 draft legislation — Other amendments to reflect general corporate tax rate reductions, including:

 

  • Amendments to change the factor in the paragraph 110(1)(k) deduction for Part VI.I tax for years ending subsequent to 2009
November 21, 2012

August 27, 2010 (Part 3) draft legislation — Remaining 2010 federal budget measures, such as:

 

  • Aggressive tax planning
  • Foreign tax credit (FTC) generator rules
  • Loss utilization regarding income trust conversions.
November 21, 2012

November 5, 2010 draft legislation — Mini-technical bill #1, miscellaneous amendments to, among other things, provide for:

 

  • Partnerships, warranties, pensions and the lifetime capital gains exemption.
November 21, 2012
March 16, 2011 draft legislation — To respond to three specific Federal Court of Appeal cases that the taxpayer won. November 21, 2012

October 31, 2011 draft legislation — Mini-technical bill #2, miscellaneous amendments to, among other things:

 

  • Prevent a personal services business from receiving the general rate reduction on its taxable income.
November 21, 2012
December 16, 2011 draft legislation — Extending the deadline for an election under the corporate partnership tax deferral rules. November 21, 2012
* Any modifications to "old Bill C-10" measures after June 15, 2007 will have to be studied to determine whether the date of substantive enactment has changed.  

 

We Can Help

 

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 IFRS, ASPE and U.S. GAAP for income tax accounts and disclosures. For details, contact your KPMG adviser.

 

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Information is current to November 22, 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.

 

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