tax accounting for income tax: implications of the proposed sift rules june 2007 kpmg llp

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Accounting for Income Tax: Accounting for Income Tax: Implications of the Proposed Implications of the Proposed SIFT RulesSIFT RulesJune 2007June 2007KPMG LLPKPMG LLP

June 2007June 2007


Agenda

Overview of proposed SIFT rules

SIFT imposes “income tax”

Pre-SIFT legislation

Substantive enactment

Accounting implications

Period to book impact of change in tax law

Calculation of future tax assets/liabilities

Reporting impact on future tax assets/liabilities

Impact on subsidiary trusts and partnerships


Overview

Bill C-52 contains the proposed legislation that will subject distributions from certain trusts and partnerships (“SIFT”) to a tax at a rate similar to the corporate tax rate

The distributions for trusts that existed on October 31, 2006 will be subject to tax for taxation years ending after 2010 or earlier if certain growth guidelines are exceeded

Trusts formed after October 31, 2006 will be subject to the distribution tax for its first taxation year ending after 2006


SIFT Tax is “Income Tax”

SIFT tax is an “income tax”

The accounting falls under CICA Handbook Section 3465 - Income Taxes

The proposals are not a “tax on distributions” of SIFTs that would not be subject to CICA 3465


Pre-SIFT Proposed Legislation

Most SIFT trusts historically met the conditions of EIC 107 and are exempt from recognizing its future income tax assets and liabilities

As a result of Bill C-52, a SIFT trust will no longer be exempt as its distributions will effectively no longer be deductible for tax purposes and therefore will not effectively be an exemption from income taxes (current or future)


Substantive Enactment

Because proposed SIFT rules is a proposed change to “income tax legislation”, rules in CICA 3465 and EIC 111 regarding “substantively enacted” changes in tax legislation and tax rates applies

In accordance with EIC 111, where there is a minority government, the legislation is substantially enacted for Canadian GAAP when it has passed third reading in the House of Commons

Bill C-52 passed third reading on June 12, 2007 → considered “substantively enacted” as of that date


Impact of Change in Tax Law

Effect of changes in tax laws or rates is reflected in the period that includes the substantive enactment date, even though the changes may not be effective until future periods First reporting date after June 12, 2007 [for calendar year end

companies, for the second quarter ended June 30, 2007]

Impact is reported prospectively (i.e., prior period financial statements not restated for this change)

Cumulative impact of recording future income taxes for SIFT legislation as at 6/12/2007 is NOT factored into estimated effective tax rate Charged to income tax expense as lump sum in the quarter that

includes 6/12/2007

Except for estimated impact on the 2007 current income tax liability and future income taxes relating to temporary differences that will originate or reverse subsequent to 6/12/2007


Calculation of Future Tax Assets and Liabilities

In accordance with 3465, SIFT has to: Determine its “tax status” at each balance sheet

reporting date

Determine its “temporary differences” as of the date of substantive enactment of the proposed legislation

Determine the expected time period(s) over which those temporary differences are expected to reverse

Apply the income tax rates expected to apply in the period(s) in which those temporary differences are expected to reverse, using income tax rates that have been substantively enacted as of the date of the substantive enactment of the proposed legislation


Calculation of Future Tax Assets and Liabilities

Require “scheduling” the reversal of the temporary differences

At least two time periods → those that are expected to reverse prior to December 31, 2011 (for a calendar year SIFT) and those that are expected to reverse thereafter

Usually a tax rate of NIL for 4-year period to 2011 and then rate applicable to SIFTs for period thereafter

This approach and use of tax rate of NIL through 2010 assumes SIFT qualifies under EIC 107 to account for income taxes through to end of 2010 as if it was “exempt” from income taxes; otherwise, SIFT would use full SIFT and/or trust tax rates for all temporary differences that will reverse after June 12, 2007


Income Tax Rate Expected to Apply

Future reorganizations proposed by management which may result in a tax rate different from the SIFT tax rate should not be considered until the reporting period that such reorganization occurs

For example, for some SIFT trusts, the corporate tax rate may be lower than the SIFT tax rate (i.e., provincial tax rate differences) and the SIFT may ultimately reorganize as a corporation

In this situation, the change in the tax rate as a result of the reorganization is a future tax recovery or expense in that period

The SIFT should also consider whether the conversion will result in a change of control for accounting purposes


Reporting Impact

The net future tax asset or liability will result in a current period future tax recovery or expense and not an adjustment to equity

In situations where the asset or liability of the SIFT was previously acquired in a business combination, which results in a temporary difference, no adjustment to the original purchase price should be made


Subsidiary Trust/Partnership

In many cases the SIFT (i.e., the public trust) will have investments in subsidiary trusts and partnerships

If these subsidiaries are not subject to the SIFT tax on distributions then no future tax asset or liability should be set-up for the temporary differences of those entities at the subsidiary level → assuming EIC 107 exemption still applies

The SIFT should set-up the “outside basis” temporary differences of the subsidiaries in the same manner that a corporation would account for the temporary differences of such entities

CICA 3465.37 exemption not available

Consider periods over which sub-trust’s “inside basis” temporary differences will reverse

The information contained herein [or insert the title of the presentation, report, or talkbook] is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor 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 on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2004 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada on recycled paper.

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KPMG ContactsKPMG Contacts

NameName TelephoneTelephone EmailEmail

Jodi RoworthJodi Roworth 691-8092691-8092 [email protected]@kpmg.ca

Chris PostChris Post 691-8434691-8434 [email protected]@kpmg.ca

John GordonJohn Gordon 691-8118691-8118 [email protected]@kpmg.ca

Rick WhitleyRick Whitley 691-8216691-8216 [email protected]@kpmg.ca

tax accounting for income tax: implications of the proposed sift rules june 2007 kpmg llp

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