Chapter 15 Slides For Class RP

INCOME TAXES
CHAPTER 15
ACCT 3050
SIMPLE EXAMPLE - TAXES
Accounting Income (per F/S) $100,000

Add: Depreciation $
25,000
Deduct: CCA
($31,000)
Taxable Income $
94,000
Tax rate
30%
Income tax payable
$28,200
Depreciation is not deductible for tax purposes. CCA

(Capital Cost Allowance) is.
ACCOUNTING VERSUS TAXABLE INCOME
• Accounting income is determined according to
GAAP (IFRS or ASPE)
• Taxable income is determined in accordance with
the Income Tax Act and Regulations
• Taxable income is used to determine taxes payable
• Accounting income and taxable income are almost
always not equal
• Therefore big question is how do we account for
income tax expense and income taxes payable if we
want to follow proper matching principles
TEMPORARY (OR REVERSING)
AND PERMANENT DIFFERENCES
• To calculate current income tax expense and current
taxes payable you start with accounting income and
adjust it to taxable income and then apply the appropriate
tax rate – Schedule 1 of the corporate tax return (you will
see Schedule 1 in your tax class).
• These adjustments can be either temporary/reversing

differences or permanent differences
More details to come!

TEMPORARY (OR REVERSING)
AND PERMANENT DIFFERENCES
PERMANENT DIFFERENCES
• Some items are recorded in accounting income but never in taxable
income
• Some items are included in taxable income but never in accounting
income
• Examples:
• Dividends from Canadian corporations (tax free revenue)
• Proceeds from life insurance policies (non-taxable)
• Fines and penalties (non-taxable expense)
• Golf club and social dues (non-taxable expense)
• Meals (50% taxable only)
• Depletion allowances (Allowed in taxable profit but not in
Accounting profit)
TEMPORARY (OR REVERSING) DIFFERENCES
Temporary differences are treated the same for accounting and tax
purposes but in different periods
They could be as a result of:
– Revenues or gains that are taxable in a period after they are
recognized in accounting income (ex: installment sales)
– Expenses or losses that are deductible for tax purposes after
they are recognized in accounting income (ex: warranties)
– Revenues or gains that are taxable before they are
recognized in accounting income (ex: revenue in advance –
royalties, rentals)
– Expenses or losses that are deductible for tax purposes
before they are recognized in accounting income (ex: CCA
versus depreciation)
TEMPORARY DIFFERENCES
Two types of temporary differences
– Taxable temporary differences will result in taxable
amounts in future years (added to accounting income in
calculating taxable income) – deferred tax liability
– Deductible temporary differences will decrease taxable

income and taxes in the future (deducted from
accounting income in calculating taxable income) –
deferred tax asset
TEMPORARY DIFFERENCES (IMPORTANT!)
If AI > TI then Deferred Tax Liability (DTL)
If AI < TI then Deferred Tax Asset (DTA)
Where:
AI = Accounting Income
TI – Taxable Income
Let’s Practice Example #3

Homework: FOL Example #4
TO DETERMINE DTL OR DTA (SET UP A CHART)
Deferred Tax
Tax Carrying Tax Asset
Balance Sheet Base Amount Difference Rate (Liability)
ACCOUNT per tax calc on bal sheet Tax - CV Given Diff x tax rate
INCOME TAX ACCOUNTING OBJECTIVES
1. Recognize the amount of tax that is payable or
refundable for the current year
1. Journalize the deferred asset or deferred liability.
Separate out current and deferred.
2. Recognize the tax effects in the same accounting period

as the related transactions and events (referred to as
interperiod tax allocation)
1. Prepare income statement – separate out current
and deferred expenses.
TAX RATE CONSIDERATIONS
• To this point the assumption we have calculated deferred
taxes using the current tax rate. What happens if the tax
rate changes or will be different for future years?
• General principle is to use the rates that are expected to

apply when the temporary differences are expected to
reverse (i.e. when tax assets are realized or tax liabilities
are settled)
• When a change in tax rate is passed into law its effect on

the existing deferred tax asset and liability accounts is
recorded immediately as an adjustment to income tax
expense in the period of change
Let’s practice Example #5

REPORTING
IFRS – can net the DTA/DTL on the balance sheet to one
account (depending if positive or negative).
ASPE – can have DTA and DTL
Let’s practice Example #12 + #14

Homework: FOL Example #11 + #13
LOSS CARRYOVER BENEFITS
• Tax laws permit taxpayers to use a tax loss of one year to
offset taxable income of other years
• Can carry a tax loss back and apply it against taxable

income of the immediately preceding 3 years
• Can carry losses forward up to 20 years and apply them

against future taxable income
• Benefit of a loss carry back is the recovery of taxes

previously paid
Entry is Dr. Income Tax Receivable

Cr. Current
Income Tax
• For losses carried forward the issue is should the tax
benefit be realized in the loss year when the potential
benefit arises or in future years when the benefits are
actually realized.
• Both IFRS and ASPE are consistent on this in that if it is

“probable” (more than 50% likely) that the benefit will be
realized then the benefit should be realized at the time of
the loss.
Entry is Dr. Deferred Tax Asset

Cr. Deferred
Income Tax
Let’s practice Example #9 + #1 + #2

Homework: Textbook 15-6 + 15-8
• If future taxable income is not likely then the benefit is not

recorded. Instead the amounts of available tax losses and
their expiry dates are disclosed in the notes to the f/s
• If a tax loss carryforward that was not recognized

previously is used in a subsequent period, then the current
tax expense and taxes payable amounts are reduced in
the year it is used. Separate disclosure of the tax benefit
of the unrecorded loss carryforward is not required under
ASPE but it is required under IFRS if it makes up a major
component of the tax expense

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INCOME TAXES

Accounting Income (per F/S) $100,000

Depreciation is not deductible for tax purposes. CCA

• These adjustments can be either temporary/reversing

More details to come!

– Deductible temporary differences will decrease taxable

If AI > TI then Deferred Tax Liability (DTL)

If AI < TI then Deferred Tax Asset (DTA)

Let’s Practice Example #3

2. Recognize the tax effects in the same accounting period

• General principle is to use the rates that are expected to

• When a change in tax rate is passed into law its effect on

Let’s practice Example #5

ASPE – can have DTA and DTL

Let’s practice Example #12 + #14

• Can carry a tax loss back and apply it against taxable

• Can carry losses forward up to 20 years and apply them

• Benefit of a loss carry back is the recovery of taxes

Entry is Dr. Income Tax Receivable

• Both IFRS and ASPE are consistent on this in that if it is

Entry is Dr. Deferred Tax Asset

Let’s practice Example #9 + #1 + #2

• If future taxable income is not likely then the benefit is not

• If a tax loss carryforward that was not recognized

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