TSG (Tax Specialist Group) - Impact of IFRS On Canadian Tax (IFRS)

All Canadian publicly accountable enterprises (including all publicly traded corporations) will be required to adopt the new International Financial Reporting Standards (IFRS) for fiscal years that begin January 2011 or later. Private enterprises may adopt IFRS if they wish.

In Income Tax Technical News No. 42, the Canada Revenue Agency (CRA) accepts IFRS as an acceptable starting point in determining income for tax purposes, just as Canadian generally accepted accounting principles (GAAP) have been used for decades. However, accounting standards are not always the basis for calculating profit for tax purposes. First, the Income Tax Act provides dozens of specific rules that affect the calculation of income. Second, as stated by the Supreme Court of Canada in the 1998 Canderel case, a taxpayer’s goal is to obtain an accurate picture of profits using the provisions of the Income Tax Act, established case law principles and well-accepted business principles (which may include IFRS, GAAP or some other appropriate method).

The CRA accepts early adoption of IFRS starting on or after January 1, 2009. The change to IFRS may result in differences in determining taxable income. For example, IFRS may require the capitalization of an expenditure where GAAP could require expense treatment. In this example if GAAP was in line with the tax treatment, a change to IFRS would require a previously unnecessary tax adjustment.

The change to IFRS will also result in balance sheet adjustments the will affect balance sheet-related tax items. For example, the thin capitalization rules limit the deductibility of interest in some cases, based on a company’s debt to equity ratio. Where changing to IFRS affects retained earnings, debt to equity ratios could be affected.

It is important to anticipate the differences that will arise on a change to IFRS.

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