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Dave Santerre : Ifrs Ifrs Gaap Ifrs Ifrs IAS IAS Gaap
Dave Santerre : Ifrs Ifrs Gaap Ifrs Ifrs IAS IAS Gaap
Dave Santerre : Ifrs Ifrs Gaap Ifrs Ifrs IAS IAS Gaap
Abstract
The adoption of international financial reporting standards ( IFRS) in Canada noticeably
modifies accounting for income taxes. The purpose of this chapter is to inform the reader
about accounting for income taxes in financial statements prepared according to IFRS. The
chapter begins with a brief history of accounting for income taxes under Canadian generally
accepted accounting principles (GAAP) up to the adoption of IFRS on January 1, 2011. It then
outlines the changes that affect accounting for income taxes according to IFRS, as
prescribed under IAS 12. While the basics of accounting for income taxes will be looked at,
the chapter focuses primarily on the difference in accounting treatment between the
current IAS 12 standard and the current practices under Canadian GAAP.
Introduction
The adoption of international financial reporting standards (IFRS) is the topic
of the day in the finance function of companies. The changeover from Canadian
generally accepted accounting principles (GAAP) to IFRS took place on January 1,
2011 for all Canadian publicly accountable enterprises.1 IFRS will apply to annual
and interim financial statements for years beginning on or after that date.
93
94 / IFRS: Adoption in Canada
2 See the chapter by Jason Doucet in this volume for an analysis of the impacts on tax
compliance with the changeover to IFRS in Canada.
3 International Accounting Standards Board, International Accounting Standard IAS 12,
“Income Taxes,” October 1996, as amended.
4 See the 1968 version of Canadian Institute of Chartered Accountants, CICA Handbook
(Toronto: CICA) (looseleaf ).
Accounting for Income Taxes According to IFRS / 95
deferral method when accounting for income taxes. This method ties the in-
come tax expense or income tax recovery to the accounting income for the year,
whether the taxes were paid in a previous year or will become payable in a future
year. Thus, the tax effect of transactions is accounted for in the same year as the
underlying transactions using a tax deferral in the income statement. Under this
method, the tax deferral calculation is based on the effective rate upon initial
recognition, without being subsequently restated to take into account changes
in tax rates. This approach is based on an income statement analysis, as opposed
to the balance-sheet-based approach that is currently used (and described below).
In 1973, following the adoption of the new Income Tax Act5 (reflecting
proposals for tax reform in the Report of the Royal Commission on Taxation6 and
the 1969 white paper7), section 3471 (“Corporate Income Taxes—Additional
Areas”) was added to the CICA Handbook to specify the accounting treatment
resulting from certain new tax provisions, such as those dealing with refundable
taxes or a change in a company’s tax status.
US listed companies may be allowed to adopt IFRS in the foreseeable future. The
IASB was pursuing its intention to amend IAS 12 in order to
income tax under part I of the Income Tax Act (Canada),16 its provincial equiva-
lent, or that of another country; taxable income can also be a gross or net profit
margin. What counts is that revenues are reduced by certain expenses. This
explains why taxes based on sales or gross revenue are not considered to be in-
come taxes. Moreover, a company can be subject to two or more income taxes.
For example, companies with mining operations in Quebec are subject to prov-
incial mining duties and are also taxable under the federal and Quebec income
tax acts.17
Income taxes also include taxes, such as withholding taxes, that are payable
by a subsidiary, associate, or joint venture on distributions to the entity present-
ing its financial statements.18 However, IAS 12 does not deal with methods of
accounting for government grants or investment tax credits.19 As we will see,
IAS 20 (“Accounting for Government Grants and Disclosure of Government
Assistance”)20 addresses accounting for government assistance.
the amount that will be deductible for tax purposes against any taxable economic
benefits that will flow to an entity when it recovers the carrying amount of the
asset. If those economic benefits will not be taxable, the tax base of the asset is equal
to its carrying amount.21
For example, the tax base of property, plant, and equipment is the unamortized
capital cost. For an investment, the tax base is its adjusted cost base that is used
to calculate the capital gain on disposal. Additional examples of tax base can be
found in appendix A of IAS 12.
In some situations, the tax base of an asset is different depending on whether
the asset is utilized or sold. In this case, Canadian GAAP state that the tax base
of the asset to be used is the greater of those amounts.22 This method leads to
the recognition of the minimum tax effect that could result from the realization
of the asset for its carrying amount. Yet under IFRS, the asset’s tax base must be
determined according to management’s expected manner of recovery.23 The
same treatment applies to liabilities. Thus, when the tax base associated with
management’s expected manner of recovery is not the highest amount, there
will be a difference between IFRS and Canadian GAAP.
This difference arises, for example, in the accounting treatment of eligible
capital property (ECP).24 Eligible capital expenses are deductible for tax purposes
up to a maximum of 75 percent of costs incurred. In addition, 75 percent of the
amount received when the property is sold is included as proceeds of disposition.
The portion of the amount received that exceeds the total cost of the company’s
cumulative eligible capital (CEC) is ultimately taxable at a 50 percent inclusion
rate. For the purposes of calculating the tax base of an asset that qualifies as ECP
used in the company, the deductible amount is equal to 75 percent of costs
incurred. However, if an asset that qualifies as ECP is sold, the “cumulative eligible
capital expenditure” amount will be reduced only by 75 percent of the amount
received,25 thus resulting in a tax base equivalent to 100 percent of costs incurred,
less tax deductions claimed in the past.
Take the example of an asset that qualifies as ECP with a historic cost of
$100,000, which will be recovered when sold. For tax purposes, $75,000 is
added to the CEC, which is deductible at an annual rate of 7 percent. However,
if the asset is sold immediately for $100,000, 25 percent of the proceeds of
disposition will not be taxable. The sale will have no tax consequence for the
entity.26 Under IFRS, in the event of a sale, the tax base is therefore equal to
the carrying amount of $100,000—that is, the amount included in the CEC of
$75,000 plus the non-taxable portion of the proceeds of disposition ($25,000).
However, if the expected manner of recovery is through use, the tax base will
be $75,000. Under Canadian GAAP, regardless of the expected manner of re-
covery, the tax base will always be the higher of the two amounts—$100,000
in this case.
26 This example is based on the assumption that no property was previously included in the
entity’s ECE.
27 IAS 12, supra note 3, at paragraph 47.
28 CICA Handbook, supra note 22, at section 3465.56.
29 IAS 12, supra note 3, at paragraph 48.
30 PricewaterhouseCoopers, Manual of Accounting—IFRS 2011 (Toronto: CCH Canadian,
2010), at chapter 13, section 71.
31 Canadian Institute of Chartered Accountants, Emerging Issues Committee, Abstract
EIC-111, “Determination of Substantively Enacted Tax Rates Under CICA 3465.”
Accounting for Income Taxes According to IFRS / 101
a law is deemed substantively enacted when the bill passes third reading in the
House of Commons.
There are certain differences between Canadian GAAP and IFRS in terms of
the income tax rates to be used in order to establish the amount of deferred tax
assets or liabilities.
In some jurisdictions, income taxes are payable at a higher or lower rate if
part or all of the profits are paid out to holders of the entity. In these circum-
stances, under IFRS, deferred tax assets and liabilities are measured at the tax
rate applicable to undistributed profits.32 If income taxes can be recovered or
paid when profits are distributed to holders of the entity, the tax effect is recog-
nized when the distribution is recorded in the financial statements.33
Under Canadian GAAP, future income tax assets resulting from a tax recovery
are recognized at the same time as the transaction that gives rise to the recovered
tax, or subsequently, when it is more likely than not that the taxes will be recov-
ered in the foreseeable future,34 whether or not the distribution was recorded in
the financial statements. Furthermore, certain rules under Canadian GAAP apply
to determine the tax rate to be used for entities that can deduct the amounts that
they distribute to unitholders, such as income trusts and real estate investment
trusts. If such an entity plans to distribute to its unitholders all or virtually all of
its income that would otherwise have been taxable, or if it is contractually com-
mitted to do so, the entity does not account for any current or deferred tax.35
IFRS do not contain any guidelines for these entities. Thus, the general
principle described above regarding the rate applicable to distributions applies;
entities must account for income taxes without considering the tax benefit of
the subsequent distributions, and record such benefit only upon distribution.
The absence of clear guidelines can create unusual situations for certain entities.
To that end, the IASB stated in March 2010 that the topic will be addressed in the
course of the work on the limited-scope exposure draft, which, as noted above,
should be published later in 2011.36
Example 1
An entity deducts $100,000 for current expenses incurred as part of a business
combination. Tax authorities may be of the opinion that the expenses are capital in
nature and should be capitalized to the cost of the shares acquired. The probabilities
that the position can be sustained are as follows:
Likelihood Weighted average
Possible outcomes of occurring of possible outcomes
percent dollars
Deduction disallowed . . . . . . . . 40 0
Deduction granted . . . . . . . . . . 60 60,000
Total . . . . . . . . . . . . . . . . . . . . . 100 60,000
Using an approach based on the weighted average of outcomes to measure the
uncertain tax provision, a liability of $40,000 (the $100,000 deduction taken less
the $60,000 deduction that can be recognized in the financial statements) should
be recorded.
If the entity chooses the estimate based on the outcome more likely to occur, no
provision is needed since the most likely scenario is that the full deduction of the
expenses will be granted.
The rationale is similar under Canadian GAAP, since uncertain tax positions
are not directly addressed in section 3465. However, contrary to IAS 37, its
equivalent, section 3290 (“Contingencies”) of the CICA Handbook, does not
exclude income taxes from its scope. In practice, the guidelines in section 3290
are used to recognize and measure uncertain tax positions. The measurement of
a liability is similar to the second of the acceptable practices under IFRS stated
above. Under Canadian GAAP, a contingent liability should be recognized for
each of the tax positions that will likely not be sustained. The degree of likeli-
hood derived from the word “likely” (defined in practice as a 70 to 80 percent
chance that something will occur) is stronger than the expression “more likely
than not” or “probable” under IFRS (more than 50 percent).
Since there is no clear guideline on this topic under IFRS, a company may
establish its own accounting policy and continue to use Canadian guidelines to
recognize and measure its uncertain tax positions, as long as the method is similar
to either of the acceptable practices described above. This choice of accounting
method under IFRS should be applied consistently from one year to the next,
unless IAS 12 is amended and the accounting treatment to be used is specified.
IAS 12 does not have any specific guideline on the classification of uncertain
tax positions. The presentation must be consistent with the general principles
above. With respect to current taxes, we are of the opinion that uncertain tax
positions from current and prior periods should be included in current tax lia-
bilities, since the entity does not have the unconditional right to defer the
settlement of the liability by more than 12 months after the reporting period,40
even if it does not expect to pay the amount within 12 months of the end of
the reporting period.
With respect to deferred taxes, we are of the opinion that the entity should
determine the tax base in its deferred tax calculation on the basis of the amount
determined according to the prior analysis. For example, if a loss carried forward
is going to be denied by the tax authorities, no deferred tax assets should be
recorded.
Canadian GAAP and IFRS do not address the presentation of interest and
penalties on uncertain tax positions in the income statement. Practices tend to
vary. Under Canadian legislation, interest and penalties on income taxes are not
deductible. Thus, some companies recognize and classify interest and penalties
as income tax expense in the income statement. Others are of the opinion that
interest and penalties are not based on the taxable income calculation and must
be recognized and classified as financing costs (interest) and operating costs
(penalties). In the March 2009 exposure draft, the IASB indicated that compan-
ies should disclose where in the income statement interest and penalties are
classified—either as an income tax expense or under operating costs. The ex-
posure draft acknowledged that various practices may be acceptable.
Finally, a company needs to consider whether disclosure of uncertainties
about income taxes is required in the main sources of uncertainties with respect
to the estimates that are included in the notes to financial statements.
• the entity has sufficient taxable temporary differences relating to the same
taxation authority and the same taxable entity, which will result in taxable
amounts against which deductible temporary differences, unused tax
losses, and unused tax credits can be charged before they expire;
• it is probable that the entity will have taxable profits before the unused
tax losses or unused tax credits expire;
• taxable profits from prior years would entitle the entity to a tax refund,
to the extent that tax laws allow carrybacks;
• unused tax losses result from identifiable causes, which are unlikely to
recur; or
• tax-planning opportunities are available to the entity that will create tax-
able profit in the period in which the unused tax losses or unused tax
credits can be charged.
Under IFRS, if an entity is unlikely to have a taxable profit that can be offset
against deductible temporary differences, unused tax losses, or unused tax credits,
the deferred tax asset is not recognized. The amount and the expiry date, if any,
of these deductible temporary differences, unused tax losses, and unused tax
credits must be disclosed in the notes to financial statements.44
In terms of presentation, Canadian GAAP offer an alternative that is not
available under IFRS: all future income tax assets can be recognized less an
amount of valuation allowance that is sufficient to reduce deferred tax assets
to an amount that will more likely than not be realized.45 The difference be-
tween the standards, if the choice has been made, can be significant for the
disclosure in the notes to financial statements, but should have no impact on
the amount of deferred tax asset or liability recognized on the balance sheet.
Under IFRS, the subsequent recognition of the acquired entity’s deferred tax
assets will be accounted for in the income statement, unless the recognition
takes place during the measurement period and results from new information
about facts and circumstances that existed at the acquisition date. In this case,
the resulting deferred tax recovery reduces goodwill to zero before being recog-
nized in the income statement.47 The measurement period is the period that
follows the acquisition date during which the acquiror can adjust amounts
temporarily recognized for the business combination. The measurement period
may not, however, exceed one year from the acquisition date.
Following a business combination, the acquiror may recognize its own de-
ferred tax asset, which was not recognized before the business combination. For
example, the acquiror may be able to utilize its unused tax losses against the
future taxable profit of the acquiree. In these cases, under IFRS, the acquiror
recognizes a deferred tax asset but does not include it as part of the accounting
for the business combination. Consequently, the acquiror does not take the
deferred tax asset into account in measuring goodwill,48 and the asset will be
accounted for in the income statement. Under Canadian GAAP, recognition of
the asset is included in the allocation of the acquiree’s purchase price.49
less than the tax base of the asset, the company must recognize the deferred tax
asset in the purchase price allocation to the extent that it is probable that this
deferred tax asset will be realized.53
base is therefore nil. Conversely, since the lease payments will be deduct-
ible in the future taxable income calculation but the notional interest
expenses recognized in income will not, the liability resulting from the
obligation under the capital lease also has a tax base of nil. Note that the
amount of future lease payments less the amount of future notional interest
expenses is equivalent to the obligation under the capital lease recognized
on the balance sheet. Therefore, when an amount related to a liability is
tax-deductible in future years, its tax base is nil.
Example 2
The following example from the CICA Handbook 56 illustrates the simultaneous
equations method:
An enterprise buys an asset for $8,000 cash. The maximum tax basis of the
asset on initial recognition is $2,000. The tax rate is 40 percent. In accordance
with paragraph 3465.43, the enterprise recognizes the asset at an initial carry-
ing amount of $12,000 and recognizes a future income tax liability of $4,000.
The initial carrying amount is determined using the formula set out below:
([Cost − tax basis] × tax rate)
Carrying value = Cost of the asset +
(1 − tax rate)
That is,
([$8,000 − $2,000] × 0.40)
Carrying value = $8,000 + = $12,000
(1 − 0.40)
The journal entry on initial recognition is:
DR Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000
CR Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,000
CR Future income tax liability . . . . . . . . . . . . . . . . . . . . . $4,000
Under IFRS, deferred taxes resulting from such transactions are not recog-
nized. For this exception to accounting for income taxes to apply, the transaction
cannot be part of a business combination, nor can it affect the accounting profit
or taxable profit of the company.
Note that for capital leases, a company may in practice recognize a deferred
tax liability resulting from the capital asset and a deferred tax asset resulting
from the obligation, since these assets and liabilities cancel each other out on
initial recognition.57 This practice is similar to that used under Canadian GAAP.
Example 3
The CICA Handbook provides the following example:60
On January 1, X1, Company P made an investment of $1,000,000 in Com-
pany S, an integrated foreign operation whose production facilities have a
fair value (and tax basis) of FC [foreign currency] 1,000,000 when the ex-
change rate is $1 = FC 1.
At December 31, X2, the exchange rate is $1 = FC 1.5.
At December 31, X2, the financial statements of Company S will reflect
the production facilities at FC 1,000,000. The consolidated financial state-
ments of Company P will reflect the production facilities at $1,000,000,
based on the historic exchange rate.
In order to recover the carrying value in the consolidated financial statements,
Company P must realize $1,000,000 or FC 1,500,000. Realization of FC 1,500,000
would lead to a future income tax liability since the tax basis of the asset is FC
1,000,000. This future income tax liability is not recognized under Canadian GAAP.
INTERCOMPANY TRANSACTIONS
A transfer of assets between companies in the same consolidated group—for
example, the sale of inventory or depreciable capital assets—will not lead to any
gain or loss for accounting purposes as long as the assets are not sold or trans-
ferred to a third party. If the transaction between related parties is made for an
amount different from the accounting cost, the seller’s gain or loss is eliminated
in the consolidated financial statements.
In this situation, under Canadian GAAP, no deferred tax asset or liability can
be recognized in the consolidated financial statements for a temporary difference
between the asset’s tax base for the purchaser and the cost indicated in the con-
solidated financial statements.61 However, all taxes paid or recovered by the vendor
following the transfer must be recognized as an asset or liability in the consoli-
dated financial statements until the gain or loss from the transaction is recognized
by the consolidated entity.
This exception does not exist under IFRS. Thus, income taxes paid or recov-
ered by the vendor are recognized in income. The same applies to deferred tax
assets or liabilities in the purchaser’s financial statements. This results in the
recognition of the tax consequences of a transaction for which no profit or loss
is recognized in the consolidated financial statements. Recognition by the vendor
of the current tax on the transaction is often offset by the recognition of the
deferred tax by the purchaser. However, if the two entities have different tax rates,
or if one of the two entities does not recognize its deferred tax asset, the effect of
this type of transaction in the income statement can be significant.
Example 4
During the year, Canadian Company A Ltd. sold assets with an accounting and tax
cost of $60,000 to its American subsidiary, US Co., for proceeds of disposition of
$100,000. The tax rate and tax consequences are as follows:
Vendor: A Ltd.
Tax cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000
Proceeds of disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30%
Current tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000
Purchaser: US Co.
Tax cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Accounting cost (consolidated) . . . . . . . . . . . . . . . . . . . . . $60,000
Tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40%
Under Canadian GAAP, there is no effect in the income statement, and current
tax is deferred until the assets are sold to a third party. The current tax liability is
therefore recognized and an asset is recognized in the financial statement until the
gain is recognized by the consolidated entity.
Under IFRS, the tax effects are recorded in the income statement:
Current tax expense of the vendor . . . . . . . . . . . . . . . . . . . $12,000
Deferred income tax of the purchaser . . . . . . . . . . . . . . . . (16,000)
Net impact in the income statement . . . . . . . . . . . . . . . . . (4,000)
The current tax liability of $12,000 and the deferred tax asset of $16,000 are
therefore recognized.
not recognized for these differences, Canadian GAAP are indicating that it is
preferable that the amount of the temporary difference be disclosed as a note to
the financial statements, as well as the related deferred taxes if they can be de-
termined after a reasonable effort is made to do so.63 In practice, very few
companies disclose this information.
IAS 12 is slightly different with respect to the terms used and the types of
investments that benefit from the exception to recognition of a deferred tax
liability.64 In addition to covering subsidiaries and joint ventures, the exception
includes branches and associates. To avoid recognizing a deferred tax liability,
the investor must be able to control the timing of the reversal of the temporary
difference, and that temporary difference should not reverse in the foreseeable
future. The conditions are similar for the recognition of a deferred tax asset. In
practice, there should not be any major difference between Canadian GAAP and
IFRS in this respect. However, for disclosures made in notes to financial state-
ments, IFRS require a company to disclose the aggregate amount of temporary
differences associated with investments in subsidiaries, branches, associates, and
interests in joint ventures for which deferred tax liabilities have not been
recognized.65
As mentioned above, very few companies keep the carrying amounts and tax
bases of their investments up to date. The “carrying amount” of the investment
refers to the amount determined under the equity method and not the historic
accounting cost of the investment. In addition to the acquisition cost, the calcu-
lation therefore requires that the following be taken into account: distributions,
profits or losses realized since the acquisition, consolidation adjustments (elimin-
ation of profit, reduction in value of assets, etc.), and the fluctuation of exchange
rates if the entity has a different functional currency. As for the tax base, the
adjusted cost base of investments must be updated. Furthermore, if a company
decides to disclose the unrecognized deferred tax liability amount, the tax effect
resulting from the reversal of temporary differences must be determined, and
this may require calculation of the various surpluses under the Canadian foreign
affiliate tax regime.
FLOWTHROUGH SHARES
In Canada, tax legislation allows a company to issue shares known as flowthrough
shares to its investors.71 Such shares serve to transfer the tax benefit associated
with certain eligible expenses from the company to its shareholders. When flow
through shares are issued and expenses are capitalized as assets for accounting
purposes, the carrying amount can exceed the tax base, because the company
renounced its right to tax deductions in favour of its investors. Under Canadian
GAAP, the deferred tax liability associated with this temporary difference is
recognized in equity as a cost of issuing securities to investors when the com-
pany renounces its deductions.72
Under IFRS, the accounting treatment for this renunciation is not specified.
Presentation
INTRAPERIOD ALLOCATION
Under Canadian GAAP, the expense or income from current or deferred taxes is
initially recognized in the income statement, unless a different allocation is in-
dicated.73 In general, Canadian GAAP require that tax be recognized initially in
the financial statements component where the underlying revenue or expense
is recorded. “Financial statements component” means the income statement,
other comprehensive income, or equity. For example, deferred tax assets result-
ing from share issue expenses should be recognized in the company’s equity—
that is, in the same item as the proceeds from the share issuance. Any change in
these deferred assets that arises in a subsequent period is recognized in the in-
come statement.
Under IFRS, current and deferred taxes must be recognized in the income
statement or elsewhere in the financial statements, such as in other comprehen-
sive income or equity, on the basis of the element that triggered the tax effect
in either the original period or a prior period. This intraperiod allocation
method for change in subsequent periods is known as backward tracing.
The amount of the deferred tax assets or liabilities can change in a period
subsequent to their recognition, even if there has been no change in the tempor-
ary differences. For example, such change can result from
Contrary to Canadian GAAP, the change in value of the deferred tax asset or
liability will be allocated to the financial statements component where the
temporary difference was originally recognized. For example, a change affecting
the deferred tax assets resulting from a share issue expense will be allocated to
equity, as shown in the following example.
Example 5
On January 1, X2, the provincial government announced a reduction in the cor-
porate tax rate from 12 to 10 percent. The federal rate remained unchanged at
15 percent. At that time, the company recognized the deferred tax assets and liabil-
ities on the following temporary differences:
Temporary Deferred tax
difference Before After
dollars
Capital assets . . . . . . . . . . . . . (100,000) (27,000) (25,000)
Share issue expenses . . . . . . . 40,000 10,800 10,000
Loss carried forward . . . . . . . 80,000 21,600 20,000
Total . . . . . . . . . . . . . . . . . . . 20,000 5,400 5,000
The reduced tax rates generated a $400 reduction in deferred tax assets, and the
resulting income tax expense will be allocated differently to financial statement
components depending on whether Canadian GAAP or IFRS are used.
Under Canadian GAAP, the total $400 tax expense will be allocated to the in-
come statement. Under IFRS, the origin of the temporary differences needs to be
analyzed. In the example, share issue expenses were first recognized in equity, whereas
the other differences were recorded in the income statement. Thus, the expense
resulting from the reduction of the asset by $800 in share issue expenses will be
allocated to equity, and the $400 income tax recovery will be allocated to the in-
come statement for the other temporary differences.
hensive income or equity. In such cases, the current and deferred tax related to
items that are recognized outside the income statement are based on a reason-
able pro rata allocation of the current and deferred tax of the entity, or another
method that achieves a more appropriate allocation in the circumstances.74
If a temporary difference results from several different components of the
financial statements, it will be divided among those various components. This
may be the case, for example, for deductions for financing expenses under
paragraph 20(1)(e) of the ITA, which may result from the issuance of shares or
debt. In the event of a share issue, equity is affected, and for a debt issue, the
income statement is affected.
With respect to adjustments to retained earnings resulting from the change-
over to IFRS, authoritative accounting literature states that retrospective allocation
must not be made to retained earnings, but rather be based on the financial
statements component that would have been affected if the company had always
used IFRS to prepare its financial statements.75
• the entity offsets the ITC against the tax expense in the income statement,
similar to the method proposed under IAS 12; or
• the entity offsets the ITC against the reduction of the expense that entitled
it to the credit, similar to the method proposed under IAS 20.
Accounting for ITCs under IAS 20 is similar to the approach under Canadian
GAAP. The accounting policy used, including the presentation method in the
income statement, should be disclosed in a note to financial statements.
Under Canadian GAAP, an entity is not obliged to have the intention to settle
assets and liabilities simultaneously in order to be required to offset the balances.
It simply needs to have the right to do it. For example, an entity is entitled to
a $100,000 federal refund for the previous year, but it records current taxes that
are $60,000 more than the tax instalments made for the current year. Under
IFRS, the entity does not have to offset these balances if it requests the previous
year’s refund, whereas it would be required to do so under Canadian GAAP.
1) The applicable tax rate is the rate paid by the ultimate entity that prepares
its financial statements. In this case, the difference between the statutory
rate of the entity and the statutory rate of the consolidated entities is a
reconciliation item.
2) The applicable tax rate is the weighted average of the rates applicable to
the entities of the consolidated group.
The first method is used under Canadian GAAP. Furthermore, under IFRS, the
company must explain changes made to applicable tax rates if they are different
from the rates applied in previous periods.90
• any adjustments recognized in the period for current tax of prior periods
(for example, differences between the prior-period tax expense and the
amount calculated on the tax return);91
• the amount of the benefit arising from a previously unrecognized tax loss,
tax credit, or temporary difference of a prior period that is used to reduce
the current tax expense or deferred tax;92
• with respect to discontinued operations, the tax expense relating to the
gain or loss on discontinuance and current income from discontinued
operation for the period, together with the corresponding amounts for
each prior period presented;93 and,
• when the utilization of the deferred tax asset depends on factors other
than the reversal of existing taxable temporary differences and the entity
has suffered a loss in either the current or a preceding period in the tax
jurisdiction to which the deferred tax asset relates, an indication of the
nature of the evidence supporting its recognition.94
Conclusion
The changeover from Canadian GAAP to IFRS will involve its share of work for
tax professionals. As demonstrated in this chapter, the approach to accounting
for income taxes has not undergone any drastic changes. However, in most
companies, a financial effect of some kind will need to be recorded at the time
of changeover. The notes to financial statements related to income taxes will be
different, and more information will be needed for disclosure. In addition, the
processes and worksheets used for the preparation of the tax provision will need
to be revisited and adapted to the new IFRS requirements.