Ch.23 Income taxes

Question 1

Current Taxes Payable

Answer 1

income taxes payable is obtained when the tax liability is calculated for the year based on the Income Tax Act
Dr. Current income tax expense$XXX
Cr. Income taxes payable — current$XXX

Question 2

Permanent Differences

Answer 2

revenue, expense, gain, or loss that is used in calculating either accounting income or taxable income, but never both
Permanent income differences — income types not subject to income taxes:
• dividends received from a Canadian corporation by another Canadian corporation
• 50% of a capital gain
Permanent expense differences — expenses not deductible for tax purposes:
• golf club memberships
• 50% of meals and entertainment
• political contributions
• interest and penalties on taxes

Question 3

Deferred Taxes

Answer 3

Deferred taxes arise from temporary differences in the treatment of a transaction for accounting purposes versus tax purposes. These differences can lead to increased taxes payable in the future (a deferred tax liability) or a reduction in future income taxes (a deferred tax asset).

Question 4

Step 1: Determine temporary differences

Answer 4

arise when the accounting treatment and tax treatment of an asset or liability differ. Over time, these differences will reverse.
identify assets and liabilities whose values may be different for accounting purposes and tax purposes
consider how the net book value of property, plant, and equipment (PP&E) is different from the balance of its undepreciated capital cost (UCC)
HINT: Watch for land included as part of the accounting balance of PP&E. Land is not included in UCC, so the tax basis only reflects depreciable assets. A quick fix is to remove the land from the accounting basis to ensure only depreciable assets are included in the accounting basis for PP&E.

Question 5

Step 2: Calculate the balance of deferred taxes

Answer 5

multiply the total of the temporary differences column by the tax rate substantively enacted at the reporting date. This is usually provided in the case facts.
Note that a positive balance is a deferred tax asset and a negative balance is a deferred tax liability.

Question 6

Step 3: Adjust deferred tax asset or liability to actual

Answer 6

adjust the balance sheet deferred tax asset or liability.

Identify the opening balance of the deferred tax asset or liability from the case facts or the opening balance sheet. The difference between the opening balance and the amount determined in Step 2 would be adjusted to deferred tax expense (recovery).

Question 7

Accounting for Tax Losses

Answer 7

tax losses may arise in a year. Under current Canadian tax laws, these tax losses may either be:
• carried back and applied to any of the previous three years (these loss carrybacks will allow the company to recover any previous taxes paid in those years); or
• carried forward up to 20 years to be applied against future taxable income (these loss carryforwards result in the company having future possible tax savings).