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TAX Accounting for Income Tax: Implications of the Proposed SIFT Rules June 2007 KPMG LLP

TAX Accounting for Income Tax: Implications of the Proposed SIFT Rules June 2007 KPMG LLP. June 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

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TAX Accounting for Income Tax: Implications of the Proposed SIFT Rules June 2007 KPMG LLP

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  1. TAX Accounting for Income Tax: Implications of the Proposed SIFT Rules June 2007 KPMG LLP June 2007

  2. 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

  3. 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

  4. 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

  5. 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)

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. KPMG Contacts .

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