Tax Accounting 101 PDF

www.pwc.
com
Expert Access
Seminar Series:
Tax Accounting 101
September 14, 2011

Tax Accounting Basics
Introduction to Tax
Accounting
Robin Caicco
Darren Speake
(905) 869
(416) 777-7003
2471
Robin.T.Caicco@ca.pwc.com
darren.speak@ca.pwc.com
Chantal Copithorn
Ernesto Basso
777-7030
(905) 949 7348
Chantal.S.Copithorn@ca.pwc.com
ernesto.basso@ca.pwc.com
Sheri Gauthier
(905) 949-7301
Sheri.Gauthier@ca.pwc.com
November 25, 2008
PwC
Agenda
Section one: Differences in GAAP and impact on tax provision
Section two: Deferred income taxes
Section three: Current taxes
Section four: Effective tax rate reconciliation
Section five: Tax Contingencies
Section six: Valuation Allowances
Section seven: Accounting for Research and Development Tax

Incentives
3
PwC
Objective:
1. Provide refresher on basic tax accounting concepts

2. Highlight some advanced tax accounting areas
3. Highlight differences and similarities between US GAAP and IFRS
and ASPE
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice.
You should not act upon the information contained in this publication without obtaining specific professional advice. No
representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this
publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, an Ontario limited liability partnership, its
members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else
acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
4
PwC
Accounting for Income Taxes
Differences in GAAP
• Approach is essentially the same across US GAAP, IFRS and ASPE
• Based on balance sheet approach (deferred taxes)
• - Entity recognizes a deferred tax asset or liability for the difference

between accounting and tax attributes
• - Deductible / Taxable Temporary Difference: essentially the same

definitions
• Recognition Criteria for Deferred Tax Asset: “probable” (IFRS)

standard generally interpreted the same as “more likely than not”
standard (US GAAP and ASPE).
5
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Accounting for Income Taxes
Differences in GAAP
• Deferred tax assets and liabilities are calculated using the expected
tax rate when the temporary difference is expected to reverse
• IAS 12 and ASPE include concept of the substantively enacted rate,

whereas US GAAP requires use of enacted legislation
• IASB has cited guidance in EIC 111 as an example of how to

determine substantively enacted tax rate
6
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Impact on Income Tax Provision
• Computation of taxable income is based on the provisions of the

Income Tax Act (ITA)
• Income from business or property is the taxpayer’s “profit” from

that business or property
• Profit is not defined in subsection 9(1) of the ITA, therefore
interpretation has developed through jurisprudence.
7
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Impact on Income Tax Provision
CRA Views?
• They have not expressed any concerns regarding the move to IFRS with
respect to the computation of taxable income/profit
• “New accounting standards are not law and as such, should not change
how the CRA interprets and applies the Act”
• “New accounting standards will be taken into consideration when the

CRA interprets and applies the Act in a given situation”
• CRA has also provided confirmation that US GAAP may also be

appropriate for tax purposes in certain circumstances
• Understand impact on taxable income adjustments

8
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Impact on Income Taxes
Consider Impact on Balance Sheet
• Thin capitalization – definition of debt/equity (CRA silent to date w.r.t.

balance sheet impact of IFRS adoption)
• Rate of Quebec Research and Development Wage Tax Credit depends on

an asset test
• Enhanced SR&ED refund / Claw-back for small business deduction for

CCPCs – use certain balance sheet measures
• Provincial capital tax implications (becoming less relevant as few

provinces now have capital tax)
9
PwC
Questions?
© 2008 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the
PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.
Deferred
Income
Taxes
Deferred Income Taxes
• Concept of Deferred Taxes
• 4-Step Process
1. Accounting basis and tax basis
2. Deferred Income Taxes Proof
3. Apply the appropriate tax rate
4. Consider valuation allowances
• Deferred Income Taxes: Income Statement
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Concept of Deferred Taxes
• Cash taxes payable not a fair presentation of real tax burden
• May be tax benefit or cost when assets or liabilities realized in future
• Key: Difference between tax basis and accounting basis
• Common differences:
- Capital assets
- Intangible assets
- Pension plans
- Losses
13
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Example: Deferred Taxes In Practice

Company A owns a building that has an accounting value of $4 million
and a tax basis of $3.5 million, which means there is a temporary
difference of $0.5 million. The company’s tax rate is 40%.
Implications if the building was sold tomorrow for its accounting value:
• Accounting gain ?
• Gain/recapture for tax purposes ?
• Taxes payable ?
Therefore, there is a deferred tax ?
14
PwC
Example: Deferred Taxes In Practice

Company A owns a movie theatre that has an accounting value of $4
million and a tax basis of $3.5 million, which means there is a
temporary difference of $0.5 million. The company’s tax rate is 40%.
Implications if the building was sold tomorrow for its accounting value:
• Accounting gain nil
• Gain/recapture for tax purposes $500,000
• Taxes payable $200,000
Therefore, there is a deferred tax liability of $200,000.
15
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Quiz: Asset or Liability
1. Development costs are capitalized for accounting purposes, but

deducted for tax purposes when incurred.
2. Revenue is received in advance and deferred for accounting, but is

included in taxable income on a cash basis.
3. A liability for pension costs is recognized for accounting when the

service is provided, but is only deductible for tax when the
contributions are funded.
4. The net book value of certain assets is higher than the UCC of those
assets.
16
PwC
Quiz: Asset or Liability
1. Development costs are capitalized for accounting purposes, but

deducted for tax purposes when incurred. DT Liability
2. Revenue is received in advance and deferred for accounting, but is

included in taxable income on a cash basis. DT Asset
3. A liability for pension costs is recognized for accounting when the

service is provided, but is only deductible for tax when the
contributions are funded. DT Asset
4. The net book value of certain assets is higher than the UCC of those
assets. DT Liability
17
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4 -step Approach
1. Accounting basis and tax basis
2. Deferred Income Taxes Proof
3. Apply the appropriate tax rate
4. Consider valuation allowances
18
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Step 1: Accounting Basis and Tax Basis
Accounting values
- Financial statements
- Trial balance
Tax values
- Tax returns
- Other calculations
19
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Example: Tax Basis
Item Tax basis
Accrued liabilities of $1,000 relating to bonuses which

?
will not be paid within 180 days of year-end.
Accrued liability of $1,000, which relates to a fine
?
payable.
Loss carryforwards of $1,000. ?
Loss carryback of $500. ?
On acquisition, an asset was restated from its

?
carrying value of $500 to its fair value of $1,000.

20
Example: Tax Basis
Item Tax basis
Accrued liabilities of $1,000 relating to bonuses which

$0
will not be paid within 180 days of year-end.
Accrued liability of $1,000, which relates to a fine
$1,000
payable.
Loss carryforwards of $1,000. $1,000
Loss carryback of $500. $0
On acquisition, an asset was restated from its

$500
carrying value of $500 to its fair value of $1,000.

21
Step 2: Deferred Income Taxes Proof
Reconcile change in temporary differences from prior year to temporary

differences in 3-column schedule.
22
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3 Column Approach – Revisited
Accounting Tax Temporary
NIBT per f/s $100 $100
+/- Reconciling items:
50% of meals & entertainment 25 25
Depreciation 30 (30)
CCA (40) 40
Total $125 $115 $10
Tax expense (30% tax rate) $37 $34 $3
23
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Example: Fixed Assets Future Income Taxes Proof
Accounting Tax Temporary Future

Tax
at 30%
Capital assets – prior year
$250 $220 $30 $9
Depreciation/CCA
(30) (40) $10 $3
Capital assets – current
220 180 $40 $12
year
24
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Step 3: Apply the appropriate tax rate
Rate(s) expected to be in effect when the differences reverse
Consider:
• Changing tax rates
• “Substantively enacted” vs. “enacted”
• Subject to tax in more than one province
25
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Step 4: Consider valuation of DTA
Must consider whether deferred tax assets can be realized, and amount
that should be recognized for accounting purposes.
Factors to consider include:
• “More likely than not”/ “probable”
• Evidence of potential realization
• Tax planning strategies
26
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Deferred Income Taxes: Income Statement
Future tax expense generally equals change in net balance sheet

position of future assets and liabilities for the year
Exceptions:
• Business acquisitions
• Capital transactions
• Certain financing expenses - 20(1)(e)
27
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Example: Deferred Income Tax Expense
At Dec 31, total deferred tax assets are $420,000 and total deferred tax
liabilities are $100,000. At the end of the prior year, total deferred tax
assets were $250,000 and total deferred tax liabilities were $50,000.
During the year, on June 1, the company acquired deferred tax assets of
$100,000. Future tax rate is 40%.
What is the future tax expense or recovery for the year?
28
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Example: Deferred Income Tax Expense
At Dec 31, total deferred assets are $420,000 and total deferred tax
liabilities are $100,000. At the end of the prior year, total deferred tax
assets were $250,000 and total deferred tax liabilities were $50,000.
During the year, on June 1, the company acquired deferred tax assets of
$100,000. Future tax rate is 40%.
What is the deferred tax expense or recovery for the year?
Deferred tax recovery of $20,000.
29
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Questions?
Current
Taxes
Current Tax Expense
Taxable Income
Temporary and Non-Temporary Differences
3 Column Approach
Statutory Tax Rate
32
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Current Tax Expense
Taxable Income
Accounting income
+/- Tax Adjustments

- Permanent differences
- Temporary differences
= Net income for tax purposes
- Other adjustments (non capital losses utilized)
= Taxable income
- Apply income tax rate
- Less any applicable credits (e.g., ITC, FTC)
= Current Income Tax Payable

33
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Current Tax Expense
Temporary and Non-Temporary Differences
Temporary difference
• Generally, items not included in accounting/taxable income in

current period, but will be deducted or included in
accounting/taxable income
• Is the difference between accounting basis and tax basis of an asset

or liability
Non-temporary difference
• Items that will never be allowable deductions or additions to

taxable income or items that aren’t included in accounting income
34
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Current Tax Expense
Quiz: Temporary or Not
1. Capital cost allowance
2. Depreciation
3. Meals and entertainment
4. Provincial capital taxes paid
5. Membership fees to golf club
6. Pension expense
35
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Current Tax Expense
Quiz: Temporary or Not
1. Capital cost allowance Temporary
2. Depreciation Temporary
3. Meals and entertainment Non - temporary
4. Provincial capital taxes paid Non - temporary
5. Membership fees to golf club Non - temporary
6. Pension expense Temporary
36
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Current Tax Expense
Three-Column Approach
Accounting Tax Temporary
NIBT per f/s $100 $100
+/- Reconciling items:
50% of meals & entertainment 25 25
Depreciation 30 (30)
CCA (40) 40
Total $125 $115 $10
Tax expense (30% tax rate) $37 $34 $3

37
Current Tax Expense
Statutory Tax Rate
Determined based on:
• Type of company
• What province the company operates in
See PwC publication: Tax Facts and Figures: Canada 2011
Also find updates on Tax News Network
38
PwC
Current Taxes Payable
Current Taxes Payable Continuity
Typically organized by year and tax jurisdiction

Prior year activity
• Tax return to provision true up
• Final payments / refunds
• Interest paid / received
• Reassessments paid
• Penalties paid
Current year activity
• Current tax expense
• Installments
Tax Reserves
39
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Effective Tax Rate Reconciliation
Rate Reconciliation
Purpose of Rate Reconciliation
Common Reconciling Items
Calculating the Rate of Reconciling Items
40
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Purpose of Rate Reconciliation
Total tax expense divided by NIBT = effective tax rate (ETR)
Rate reconciliation:
• Demonstrates reasonableness of ETR
• Compares ETR to statutory rate
41
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Common Reconciling Items

Non-deductible expenses (Permanent Differences)
Rate adjustments
Change in valuation allowance
Difference in future income tax rates
Tax rate changes
Adjustments to tax reserves
Adjustments to prior year amounts (Permanent book to filing)
42
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Calculating the Rate of Reconciling Items
• Can express each item on a $ basis, or as % of NIBT
• Should provide comparatives to prior years so watch groupings
• If company has a full valuation allowance (i.e. no DTA has been

recognized) benefit of current year losses not recognized or change
in valuation allowance may be a significant component
43
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Exercise: Rate Reconciliation

Net income before taxes is $125,000. Tax expense is $52,700. Statutory rate is 36%.
Tax reserves were increased by $5,000. Non-temporary add-backs were estimated at
$10,000. Total temporary differences at the beginning of the year were $45,000,
resulting in future tax liabilities of $16,000. Tax rates used for future taxes decreased
by 2% during the year.
Net Income ?
Statutory rate ? ?
Tax rate changes ? ?
Change in tax reserves ? ?
Non-deductible expenses ? ?
Effective rate ? ?
44
PwC
Exercise: Rate Reconciliation

Net income before taxes is $125,000. Tax expense is $52,700. Statutory rate is
36%. Tax reserves were increased by $5,000. Non-temporary add-backs were
estimated at $10,000. Total temporary differences at the beginning of the year
were $45,000, resulting in future tax liabilities of $16,000. Tax rates used for
future taxes decreased by 2% during the year.
Net Income 125,000

Statutory rate 45,000 36.00%
Tax rate changes (900) (0.72%)
Change in tax reserves 5,000 4.00%
Non-deductible expenses 3,600 2.88%
Effective rate 52,700 42.16%
45
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Questions?
Tax
Contingencies
& Uncertain
Tax Positions
Tax Contingencies
IFRS Treatment
• IAS 12 does not specifically address
• IAS 37 is not considered to apply to income taxes
• Acceptable approaches include:
- Single best estimate approach
- Weighted average probability
• May consider uncertain tax position on issue by issue basis or on

combined basis
• Approach must be applied consistently
PwC Page 48
Tax Contingencies
ASPE Treatment
• ASPE different practices considered acceptable:
• Contingency approach (ASPE 3290)
• Best estimate approach
• Probable asset approach
• More likely than not approach
• Approach should be consistently applied
PwC Page 49
Tax Contingencies
US GAAP Treatment
Prescribed approach to assessment of Uncertain Tax Positions (UTP’s)
under ASC 740-10-25 (Formerly FIN 48)
• Evaluation of a “tax position” is a two-step process
1. Recognition – is it more likely than not that a tax position will

be sustained, based on technical merits?
2. Measurement – largest amount of benefit that is greater than

50% likely of being realized upon settlement
• Detection by a tax authority is assumed
PwC Page 50
Tax Contingencies
US GAAP – Measurement probability table
Possible Probability Cumulative

Estimated of Occurring Probability of
Outcome Occurring
$100 5% 5%
80 30 35
60 20 55
50 20 75
0 25 100
Page 51
Tax Contingencies
Measurement probability table: multi-GAAP
Possible Probability Cumulative Weighted-

Estimated of Occurring Probability of probability
Outcome Occurring method
$100 5% 5% $5
80 30 35 $24
60 20 55 $12
50 20 75 $10
0 25 100 $0
US GAAP : $60 = cumulative probability greater than 50% (i.e. 55% in

example)
Best estimate: $80 = highest probability of single estimate
Weighted-average: $51 = sum of estimates multiplied by probabilities
Page 52
Questions?
Valuation
Allowance
Valuation of Deferred Tax Assets
IFRS – Recognition of Deferred Tax Asset
• Recognize a Deferred Tax Asset in the balance sheet when it is

“probable” that the future economic benefits will flow to the entity;
• “Probable” is not defined in IAS 12, but generally interpreted to

mean the same as “more likely than not” (i.e. +50%)
• No concept of Valuation Allowance under IFRS
• Valuation Allowance remains relevant under US GAAP and ASPE
PwC Page 55
What affects the valuation of deferred tax asset?
• Changes in business environment (i.e. are we out of the woods?)
• Changes in tax law or tax rates
• Sources of taxable income include
- Carry backs
- Reversals of existing taxable temporary differences
- Tax planning strategies
- Future taxable income
PwC Page 56
Available approaches
GAAP Approach Probability of Valuation

Realization Allowance
Required
Record up to
IFRS Probable < 50%
amt probable
US More Likely Than Not < 50% Yes
Canadian More Likely Than Not < 50% Yes
Page 57
Questions?
Accounting
for R&D
Tax Credits
Accounting for R&D Tax Incentives
Types of Incentives
Accounting issues arise in respect of :
• Treatment of R&D Costs
• Treatment of Tax Credits
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R&D Costs
Accounting Alternatives under various GAAP:
• Capitalize and Amortize
• Recognize in income statement as incurred
61
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Temporary Difference for R&D Costs
Temporary Differences to consider:
a. R&D costs capitalized for accounting
b. R&D costs not claimed for income tax purposes (i.e. SR&ED
pools)
62
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Canadian Income Tax Treatment – High Level
• SR&ED pool is the available tax deduction consisting of:
a) Current SRED expenditures
b) Capital SRED expenditures
• Tax payers can choose how much they will claim for each year,
therefore certain Provincial SR&ED pools may be different than
Federal pools
63
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R&D Tax Credits – Accrual For Accounting Purposes
ASPE – Accrue when reasonable assurance that they will be realized
IFRS & US GAAP – Accrue when more likely than not / probable
Factors to consider:
• Prior year Audit history
• History of profitability
• Future profitability
64
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R&D Tax Credits – Accrual for Accounting Purposes
Alternatives
1) Cost reduction approach: R&D Tax Credits reduce R&D costs
2) Flow Through Approach: R&D Tax Credits reduce Tax Expense
Canadian GAAP – Must use 1)
US GAAP and IFRS:
• policy choice, therefore either 1) or 2)
• If credit is fully refundable, independent of taxable income and

income tax return then consider cost reduction approach
65
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Investment Tax Credits – Treatment for Taxable Income
Purposes
Federal Taxable Income

• Federal Investment Tax Credits (“ITC”) – Taxable in taxation year
following the year they are utilized
• Provincial Tax Credits – Generally, taxable in the year claimed
Provincial Differences
• Federal ITC - included income in year following year of claim
• OITC - included in income in same year of claim, except portion
earned on proxy amount is taxed in the year received
• ORDTC - included in income in year earned
• Quebec salary and wages R&D credit - included in income in year of
claim
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Accounting for R&D Tax Incentives – Example
Facts:
For current year, Taxpayer is planning to file a SR&ED Claim reporting the
following items:
SR&ED Current Expenditures: $4,000
SR&ED Capital Expenditures: $1,000
Federal ITC: $1,000
Assume:
a) Company is profitable with a current tax liability well in excess of
estimated federal ITCs.
b) All current SR&ED costs are expensed for accounting purposes
c) The company is a SEC registrant.
67
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Steps to Address Tax Accounting Issues:
1) Prepare proposed journal entry for ITC

2) Using 3 column approach identify impact on temporary
differences
3) Compute Future Income Tax Asset or Liability
68
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Step One:
1) ITC earned
Debit Current Tax Payable $1,000*

Credit Current Tax Expense $1,000
* Calculated as 20% of total current and capital SR&ED expenditures
In this example,
• Reasonable assurance exists regarding Company’s ability to use Tax

Credits
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Step Two – Taxable Income Adjustments:

Accounting Tax Deferred
Income Statement $10,000 $10,000
Addback Accounting Expense:
SR&ED Current Exp. $4,000 ($4,000)
SR&ED Capital Exp. $0 ($0)
Deduct Qualifying SR&ED Exp:
SR&ED Current Exp. ($4,000) $4,000
SR&ED Capital Exp. ($1,000) $1,000
ITC in Accounting Income $ 0 ($ 0) $ 0
Total Adjusted $10,000 $9,000 $1,000
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Step 3 FIT – Summary of Temporary Differences
Accounting Tax Temp Diff

Equipment * $1,000 $ 0 $1,000
SR&ED ITC Claimed ** $1,000 $ 0 $1,000
Total Tax’l Temp Diff $2,000 $ 0 $2,000
* Equipment deducted for tax purposes as SR&ED expenditure, but was capitalized
for accounting. Future amortization for accounting will not give rise to any further tax
deduction.
** ITC claimed in the current year will be added to taxable income in the following
year, therefore represents taxable temporary difference.
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Generally applied approaches
Refundable Non-refundable
ASPE Above the line Above the line
IFRS Above the line Choice
US GAAP Above the line Tax Expense *
*technically there may be choice under US GAAP
Page 72
THANK YOU !
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional
advice. You should not act upon the information contained in this publication without obtaining specific professional
advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information
contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees
and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else
acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2010 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers
LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate
legal entity.

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September 14, 2011

November 25, 2008

Section one: Differences in GAAP and impact on tax provision

Section two: Deferred income taxes

Section three: Current taxes

Section four: Effective tax rate reconciliation

Section five: Tax Contingencies

Section six: Valuation Allowances

Section seven: Accounting for Research and Development Tax

1. Provide refresher on basic tax accounting concepts

• Approach is essentially the same across US GAAP, IFRS and ASPE

• Based on balance sheet approach (deferred taxes)

• - Entity recognizes a deferred tax asset or liability for the difference

• - Deductible / Taxable Temporary Difference: essentially the same

• Recognition Criteria for Deferred Tax Asset: “probable” (IFRS)

• IAS 12 and ASPE include concept of the substantively enacted rate,

• IASB has cited guidance in EIC 111 as an example of how to

• Computation of taxable income is based on the provisions of the

• Income from business or property is the taxpayer’s “profit” from

• Profit is not defined in subsection 9(1) of the ITA, therefore

interpretation has developed through jurisprudence.

respect to the computation of taxable income/profit

• “New accounting standards will be taken into consideration when the

• CRA has also provided confirmation that US GAAP may also be

• Understand impact on taxable income adjustments

Consider Impact on Balance Sheet

• Thin capitalization – definition of debt/equity (CRA silent to date w.r.t.

• Rate of Quebec Research and Development Wage Tax Credit depends on

• Enhanced SR&ED refund / Claw-back for small business deduction for

• Provincial capital tax implications (becoming less relevant as few

• Concept of Deferred Taxes

• Deferred Income Taxes: Income Statement

Concept of Deferred Taxes

• Cash taxes payable not a fair presentation of real tax burden

• May be tax benefit or cost when assets or liabilities realized in future

• Key: Difference between tax basis and accounting basis

Example: Deferred Taxes In Practice

• Gain/recapture for tax purposes ?

Therefore, there is a deferred tax ?

Example: Deferred Taxes In Practice

• Accounting gain nil

• Gain/recapture for tax purposes $500,000

• Taxes payable $200,000

Therefore, there is a deferred tax liability of $200,000.

Quiz: Asset or Liability

1. Development costs are capitalized for accounting purposes, but

2. Revenue is received in advance and deferred for accounting, but is

3. A liability for pension costs is recognized for accounting when the

Quiz: Asset or Liability

1. Development costs are capitalized for accounting purposes, but

2. Revenue is received in advance and deferred for accounting, but is

3. A liability for pension costs is recognized for accounting when the

1. Accounting basis and tax basis

2. Deferred Income Taxes Proof

3. Apply the appropriate tax rate

4. Consider valuation allowances

Step 1: Accounting Basis and Tax Basis

Example: Tax Basis

Item Tax basis

Accrued liabilities of $1,000 relating to bonuses which

Loss carryforwards of $1,000. ?

Loss carryback of $500. ?