Income taxes

Question 1

2 types of accounting for income taxes

Answer 1

1) current taxes payable
2) deferred income taxes

Question 2

Current tax payable

Answer 2

• tax liability for current year expense

Question 3

Taxes payable method (Current tax payable)

Answer 3

• only current income taxes are recorded and deferred are ignored (only permitted under ASPE)

Question 4

Deferred taxes

Answer 4

• temporary differences in treatment of a transaction for accounting vs tax purposes (not discounted)
• deferred tax liability: increased taxes payable in the future
• deferred tax asset: reduction in the future income taxes

Question 5

Permanent differences

Answer 5

• revenue/expenses/gain/loss used in calculating accounting income or taxable income, but never both (think of Sch. 1)
• revenue: 50% capital gain, or dividend from connected corporation is not taxable
• expenses: 50% M&E, golf club membership not deductible for tax, interest and penalties not deductible for tax

Question 6

Calculating Deferred taxes

Answer 6

1) determine temporary differences
2) calculate balance (temporary difference x tax rate – + = deferred asset, - = deferred liability)
3) adjust deferred tax asset/liability (as determined in step 2)

Question 7

Temporary differences

Answer 7

• temporary difference: when the accounting treatment and tax treatment of an asset or liability over time, these difference will be reversed
• to determine temporary difference: identify assets and liabilities whose values for accounting purposes and tax purposes are different

Question 8

Temporary difference – taxable difference

Answer 8

• high income tax in the future

Question 9

Temporary difference – deductible difference

Answer 9

• less tax to be paid in the future

Question 10

Examples of temporary differences

Answer 10

• warranty liabilities: capitalized for accounting, expensed for tax
• capital lease: capitalized for accounting, expensed for tax
• decommissioning provision (ARO): capitalized for accounting, expensed for tax
• lawsuit provisions: liability for accounting, expensed for accounting
• PPE: Deprecation expense for accounting, CCA for tax
• deferred development costs: capitalized for accounting, expense for tax
• accrued liabilities (pension): liability for accounting, expense for tax
• investments at FVPL & FVTOCI: investments for accounting, cost + 50% FV for tax

Question 11

Accounting for tax losses: loss Carryback

Answer 11

• results in revision of prior year tax return, income tax recoverable results
• DR. Income tax receivable, CR. Current income tax expense (recovery)
• planning: which year to apply losses - income tax rate in higher year of recovery. The higher rate = the more taxes are recovered.
• loss can only be carried back for 3 years from loss

Question 12

Accounting for tax losses: loss carryforward

Answer 12

• any losses not applied in prior 3 years are carried forward
• recognized deferred tax asset if probable will earn sufficient taxable income to use benefit
• use enhanced rate at future date when recovery is expected
• re-assess at each reporting period if still probable and adjust
• DR. deferred tax asset, CR. deferred income tax expense (recoevery)

Question 13

ASPE differences

Answer 13

• ASPE has future income tax method (deferred income tax under IFRS)
• ASPE has the choice to report under future income tax or taxes payable method (where IFRS always accounts for both)