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On June 4, 2010, the Canada Revenue Agency (CRA) issued new guidance on how the International Financial Reporting Standards (IFRS) will affect tax reporting. The requirement to adopt IFRS applies to publicly accountable enterprises and will replace Canadian Generally Accepted Accounting Principles (GAAP) as the acceptable set of accounting standards.
Most companies that are preparing for the changeover to IFRS are aware these new requirements will be effective for fiscal years beginning on or after January 1, 2011. With this deadline looming, the CRA has outlined how the changes will affect the tax reporting function. Here’s what you need to know.
Tax law does not specify that financial statements must be prepared following any particular type of accounting principles or standards in order to determine profit. The Supreme Court stated that a taxpayer is free to adopt any method which is consistent with the tax law, established case law and well-accepted business principles. In Income Tax Technical News (No. 42), the CRA stated that financial statements based on IFRS would be an acceptable starting point to determine income for tax purposes.
If early adoption of IFRS for tax purposes is being considered purely for the taxpayer’s administrative ease because, for example, the corporation reports IFRS-based results to its parent or uses IFRS for financial reporting purposes, the CRA will accept early adoption for years commencing on or after January 1, 2009. The CRA stated that they expect taxpayers to file, along with their tax returns, the financial statements they issue for financial reporting purposes.
The CRA also expects taxpayers to apply IFRS on a consistent basis to all calculations in order to determine income tax. For example, a taxpayer should not use current GAAP to compute its thin capitalization limit and switch to IFRS to compute its revenue recognition in the same year. As well, the accounting standards used for tax purposes should be applied consistently to all years after initial adoption.
Canadian tax and case law provide rules for virtually all non-routine transactions. Given the extent of the rules that override accounting treatment, the CRA does not expect that taxable income will be significantly affected by the adoption of IFRS. However, the computation of taxable income could be much more complex because accounting treatment and tax treatment may vary in more ways than they do now. First time adopters of IFRS may need to make adjustments on Schedule 1 of a T2 return to ensure that all revenues and expenses are properly reported.
CRA does expect there to be impacts on capital taxes, thin capitalization and other narrow areas that affect income tax but anticipate these to be relatively minor for most companies. The CRA’s analysis of the impact on these taxes will be on-going.
The CRA expects to develop revisions to the General Index of Financial Information (GIFI) forms, as IFRS statements will present information differently than current Canadian GAAP.
If your organization needs assistance with IFRS conversion issues, please contact Loren Kroeker, CA, Vice President of Taxation Services, any member of MNP's Public Companies team or your local MNP advisor.
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