PWC Tax Accounting 101 2012 02 en

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
777-7003
(416)
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
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.

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).
PwC
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
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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 taxpayers profit from
that business or property
Profit is not defined in subsection 9(1) of the ITA, therefore
interpretation has developed through jurisprudence.

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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
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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)
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.
2.
3.
4.
Accounting basis and tax basis

Deferred Income Taxes Proof
Apply the appropriate tax rate
Consider valuation allowances
Deferred Income Taxes: Income Statement

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12
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

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13
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 companys 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 ?

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14
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 companys 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.

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15
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.
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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
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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

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Step 1: Accounting Basis and Tax Basis

Accounting values
- Financial statements
- Trial balance
Tax values
- Tax returns
- Other calculations

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19
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
Accrued liabilities of $1,000 relating to bonuses which
will not be paid within 180 days of year-end.
Tax basis
$0
Accrued liability of $1,000, which relates to a fine

payable.
$1,000
Loss carryforwards of $1,000.
$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.
$0
$500

21
Step 2: Deferred Income Taxes Proof

Reconcile change in temporary differences from prior year to temporary
differences in 3-column schedule.

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22
3 Column Approach Revisited

Accounting
NIBT per f/s
Tax
$100
$100
25
25
Temporary
+/- Reconciling items:

50% of meals & entertainment
Depreciation
30
(30)
CCA
(40)
40
Total
$125
$115
$10
Tax expense (30% tax rate)
$37
$34
$3

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23
Example: Fixed Assets Future Income Taxes Proof
Accounting
Tax
Temporary
Future
Tax
at 30%
Capital assets prior year

Depreciation/CCA
Capital assets current
year

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$250
$220
$30
$9
(30)
(40)
$10
$3
220
180
$40
$12
24
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

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25
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

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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)

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27
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?

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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.

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Questions?
Current
Taxes
Current Tax Expense

Taxable Income
Temporary and Non-Temporary Differences
3 Column Approach
Statutory Tax Rate

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32
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
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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 arent included in accounting income
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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

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35
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.
Non - temporary
Membership fees to golf club
6. Pension expense

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Temporary
36
Current Tax Expense
Three-Column Approach
Accounting
NIBT per f/s
Tax
$100
$100
25
25
Temporary
+/- Reconciling items:

50% of meals & entertainment
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

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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

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Effective Tax Rate Reconciliation
Rate Reconciliation
Purpose of Rate Reconciliation
Common Reconciling Items
Calculating the Rate of Reconciling Items

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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

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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)

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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

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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

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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
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%

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45
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
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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
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Page 49
Tax Contingencies
US GAAP Treatment
Prescribed approach to assessment of Uncertain Tax Positions (UTPs)
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
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Page 50
Tax Contingencies
US GAAP Measurement probability table
Possible
Estimated
Outcome
Probability
of Occurring
Cumulative
Probability of
Occurring
$100
5%
5%
80
30
35
60
20
55
50
20
75
25
100
Page 51
Tax Contingencies
Measurement probability table: multi-GAAP

Possible
Estimated
Outcome
Probability
of Occurring
Cumulative
Probability of
Occurring
Weightedprobability
method
$100
5%
5%
$5
80
30
35
$24
60
20
55
$12
50
20
75
$10
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
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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
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Page 56
Available approaches
GAAP
Approach
Probability of
Realization
Valuation
Allowance
Required
IFRS
Probable
< 50%
Record up to
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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60

R&D Costs
Accounting Alternatives under various GAAP:
Capitalize and Amortize
Recognize in income statement as incurred

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61

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)

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62

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

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63

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

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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

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65

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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66

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.
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67

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

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68

Step One:
1) ITC earned
Debit
Credit
Current Tax Payable

Current Tax Expense
$1,000*
$1,000
* Calculated as 20% of total current and capital SR&ED expenditures

In this example,
Reasonable assurance exists regarding Companys ability to use Tax
Credits
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69

Step Two Taxable Income Adjustments:
Accounting
Income Statement
$10,000
Tax
Deferred
$10,000
Addback Accounting Expense:

SR&ED Current Exp.
$4,000
($4,000)
SR&ED Capital Exp.
$0
($0)
SR&ED Current Exp.
($4,000)
$4,000
SR&ED Capital Exp.
($1,000)
$1,000
($
Deduct Qualifying SR&ED Exp:
ITC in Accounting Income
Total Adjusted
$10,000

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0)
$9,000
$1,000
70

Step 3 FIT Summary of Temporary Differences
Accounting
Tax
Temp Diff
Equipment *
$1,000
$1,000
SR&ED ITC Claimed **
$1,000
$1,000
Total Taxl Temp Diff
$2,000
$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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71
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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PWC Tax Accounting 101 2012 02 en

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www.pwc.

Tax Accounting 101

Tax Accounting Basics

Differences in GAAP and impact on tax provision

Deferred income taxes

Effective tax rate reconciliation

Section seven: Accounting for Research and Development Tax

Tax Accounting Basics

Provide refresher on basic tax accounting concepts

2. Highlight some advanced tax accounting areas

Tax Accounting Basics

Accounting for Income Taxes

Accounting for Income Taxes

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

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

Impact on Income Tax Provision

Tax Accounting Basics

Impact on Income Tax Provision

Impact on Income Taxes

Deferred Income Taxes

Concept of Deferred Taxes

Accounting basis and tax basis

Deferred Income Taxes: Income Statement

Tax Accounting Basics

Deferred Income Taxes

Concept of Deferred Taxes

Tax Accounting Basics

Deferred Income Taxes

Example: Deferred Taxes In Practice

Gain/recapture for tax purposes

Therefore, there is a deferred tax ?

Tax Accounting Basics

Deferred Income Taxes

Example: Deferred Taxes In Practice

Gain/recapture for tax purposes

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

Tax Accounting Basics

Deferred Income Taxes

Quiz: Asset or Liability

Development costs are capitalized for accounting purposes, but

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

Deferred Income Taxes

Quiz: Asset or Liability

Development costs are capitalized for accounting purposes, but

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

Deferred Income Taxes

Accounting basis and tax basis

2. Deferred Income Taxes Proof

Tax Accounting Basics

Deferred Income Taxes

Step 1: Accounting Basis and Tax Basis

Tax Accounting Basics

Deferred Income Taxes

Example: Tax Basis

Accrued liabilities of $1,000 relating to bonuses which

Accrued liability of $1,000, which relates to a fine

Loss carryforwards of $1,000.

Loss carryback of $500.

On acquisition, an asset was restated from its

Tax Accounting Basics

Deferred Income Taxes

Example: Tax Basis

Accrued liability of $1,000, which relates to a fine