This quarterly update discusses developments related to the accounting for income taxes. It includes:
- Legislative changes—July 1, 2012, to September 30, 2012
- Federal and provincial/territorial bills—tabled or received royal assent in 2012; or tabled before 2012, but did not receive royal assent before 2012
- Corporate income tax rates1—accounting status (January 1, 2009, to September 30, 2012)
- Background—determining the accounting status of income tax changes (see the Appendix on page 6)
Legislative changes—July 1 to September 30, 2012
Legislative developments from July 1 to September 30, 2012, that affect income taxes are outlined below.
August 14, 2012 draft legislative proposals
On August 14, 2012, the Department of Finance released draft legislative proposals to implement 2012 federal budget proposals. Comments were due by September 13, 2012. Key legislative proposals:
- revise the scientific research and experimental development (SR&ED) investment tax credit and expenditure rules;
- confirm the tax treatment on secondary transfer pricing adjustments with foreign affiliates;
- strengthen the thin capitalization rules;
- introduce rules to curtail a variety of transactions, referred to as foreign affiliate dumping transactions; and
- ensure that partnerships cannot be used to circumvent the intended application of sections 88 and 100 of the Income Tax Act.
The August 14, 2012 legislative proposals also include amendments to the shareholder loan rules that permit Canadian corporations to make loans to foreign parent companies or related non-resident companies without incurring the deemed dividend withholding tax, on an elective basis.
Status: As of September 30, 2012, the August 14, 2012 proposals had not been tabled in the House of Commons. For more on the August 14, 2012 draft legislation, see our:
- Developments "Legislative proposals confirm SR&ED changes" at www.pwc.com/ca/sred/developments; and
- Tax memos at www.pwc.com/ca/taxmemo:
- August 14, 2012 legislative proposals released as consultation draft";
- August 14, 2012 legislative proposals: Important international tax changes";
- August 14, 2012 legislative proposals: Alert for mining companies"; and
- 2012 Federal budget: Continued tightening."
Specified investment flow-through (SIFT), real estate investment trust (REIT) and publicly traded corporation draft legislative proposals
On July 25, 2012, the Department of Finance released draft legislative proposals that implement measures announced on July 20, 2011, relating to the taxation of SIFTs, REITs and publicly traded corporations. The proposals apply in respect of transactions involving certain stapled securities and limit the deductibility of amounts paid or payable after July 19, 2011, in respect of those stapled securities, subject to a transitional period. Comments were due by September 25, 2012. See our Tax memo "Proposed changes for SIFTs, REITs and publicly traded corporations: Deductibility of amounts paid in respect of stapled securities" at www.pwc.com/ca/taxmemo.
Status: As of September 30, 2012, these legislative proposals had not been tabled in the House of Commons.
Quebec Information Bulletin 2012-5
The Ministère des Finances released Information Bulletin 2012-5 "Harmonization with Certain Measures of the Federal Budget of March 29, 2012" on July 6, 2012.
Status: As of September 30, 2012, these measures had not been tabled in the Quebec parliament.
Federal and provincial/territorial bills
The following tables list key bills that include income tax rate changes, other income tax changes (e.g., for research and development) or capital tax changes, and that were:
- tabled or received royal assent during 2012 (Table 1); or
- tabled before 2012, but did not receive royal assent before 2012 (Table 2).
Status: No bills received first or third reading in the federal House of Commons or the provincial or territorial legislative assembly or were enacted from July 1 to September 30, 2012.
Corporate income tax rates—accounting status (January 1, 2009, to September 30, 2012)
The following information excludes Canadian-controlled private corporation small business rates and thresholds. No change in status occurred from July 1, 2012, to September 30, 2012.
For accounting purposes, knowing which income tax changes are considered "substantively enacted" for Canadian purposes and "enacted" for U.S. purposes can be important.
Under Canadian generally accepted accounting principles (GAAP), which include International Financial Reporting Standards (IFRS), and U.S. GAAP, a future tax asset or liability is measured using the future tax rate and tax law expected to apply to taxable income in the periods when the underlying temporary difference is expected to be settled or realized (or simply reversed).
For purposes of calculating future tax balances:
- Canadian GAAP requires the use of future tax rates and tax laws that were "enacted" or "substantively enacted" at the balance sheet date; and
- U.S. GAAP requires the use of "enacted" tax rates and tax laws.
For fiscal years beginning after 2010, IFRS is mandatory for publicly accountable enterprises (PAEs), which are Canadian reporting entities. However, private enterprises, not-for-profit organizations and public sector entities to which the Public Sector Accounting Handbook applies are excluded. Although an enterprise that is not a PAE is not required to adopt IFRS, it can elect to do so. Mandatory adoption of IFRS has been deferred:
- for entities with rate regulated activities until fiscal years beginning after 2012; and
- for investment companies until fiscal years beginning after 2013.
For more information, see our Tax memos "IFRS and Tax: The Rubber has Hit the Road" and "The Move to IFRS: CRA Guidance" at www.pwc.com/ca/taxmemo.
Guidance is still pending on the concept of "substantive enactment" as that term is used under IFRS. As a result, different views may exist on when an income tax change becomes "substantively enacted" under IFRS.
Before Canada's adoption of IFRS, substantive enactment did not occur until draft legislation was tabled for first reading. However, in the case of a minority government, proposed income tax amendments were not normally considered substantively enacted until the proposals had passed third reading.
1. Other than Canadian-controlled private corporation small business rates and thresholds.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.