4 th Quarter Accounting, Reporting and Tax Update January 10, 2007 CONFERENCE CALL KPMG LLP.

4th Quarter Accounting, Reporting and Tax UpdateJanuary 10, 2007

CONFERENCE CALL

KPMG LLP

2© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Agenda

John Gordon Introduction

Craig Natland Trusts: Permitted “Normal Growth”

Dennis Auger Reporting Eligible Dividends/Federal and Provincial Tax Avoidance

Murray Suey Financial Reporting Update

John Gordon Derivatives and Hedging Activities

Continuing professional education credit: You may qualify for up to 2 hours of professional education credit by attending this event.

Draft Trust Legislation

Craig NatlandPartner, Tax

403.691.8022

[email protected]


Summary of Announcements

• On October 31, 2006, Department of Finance announced new tax regime for Publicly traded Canadian income trusts, royalty trusts and partnerships—now called “Specified Investment Flow-Throughs” (“SIFT’s”)

• On December 15, 2006 the Department of Finance issued guidance on “Undue Expansion”

– Safe Harbour and permitted transactions– Conversions of SIFT’s to Corporations

• On December 21, 2006 the Department of Finance issued Draft Legislative proposals

– Distributions of certain SIFT income will be subject to tax at corporate income tax rates in the SIFT

– SIFT’s will not be able to deduct distributions of this income for tax purposes, and distributions by partnerships that are SIFT’s will be taxed in the SIFT

– Investors will be taxed as if the distributions were dividends


“Normal Growth” During Transition Period

• On December 15, 2006, Department of Finance provided further guidance on “Normal Growth”

• “Normal Growth” of a SIFT during the transition period would be allowed

• On the other hand, an aggressive interpretation of the term “undue expansion” may cause the Department to propose further legislative changes


“Normal Growth” During Transition Period (Cont'd)

Department of Finance proposed the following safe harbour guidelines:

Period Normal Growth

(Safe Harbour)

November 1, 2006 to December 31, 2007

New Equity ≤ the greater of:

a) $50 million; and

b) 40 per cent* of market capitalization (as of October 31, 2006)

For each year, from January 1, 2008 to December 31, 2010

New Equity ≤ the greater of:

a) $50 million; and

b) 20 per cent* of market capitalization (as of October 31, 2006)

New Equity = includes units and debt that is convertible into units

* Allowed percentages are cumulative (for a total of 100 per cent growth). The $50 million annual threshold allows smaller income trusts with market capitalization less than $200 million to more than double in size during the 4 year transition.


“Normal Growth” During Transition Period (Cont'd)

• Measured by ‘issuance of new equity’• Based on market capitalization—October 31st • Cumulative: 60 per cent for 2008, 80 per cent for 2009

and 100 per cent for 2010• Merger of two Trusts not part of growth limit• Special rules around debt repayment and issuance• Tax rates will be an incentive for change

2006 2007 2008 2009 2010 2011

Public Corporation (Alberta) 32.12% 32.12% 30.5% 30.0% 29.0% 28.5%

SIFT - New 0% 34.0% 33.5% 33.0% 32.0% 31.5%

• Press Release available at: http://www.fin.gc.ca/news06/06-082e.html

http://www.fin.gc.ca/news06/06-082e.html


Consultations

• The Department of Finance is accepting submission on the December 21st draft legislation until January 31st, 2007

• The “undue expansion” rules are not contained in the draft legislation of December 21, 2006

• The rules for tax free conversion from SIFT to Corporate status are not contained in the draft legislation of December 21, 2006— Finance not able to draft before Christmas

• Important to model out the effects of the draft legislation to (1) develop a strategy and (2) to ensure that the expected tax result occurs


Additional Considerations

• Possibly reducing discretionary deductions until 2011 and increasing the taxable portion of distributions in the transition period

• The future tax accounting implications of the announcements including timing of recognition and required disclosures

• Impact of “normal growth” room on mergers and acquisitions• Future structure• Going private (rules do not apply to non-listed entities, including

pension funds)

Reporting Eligible Dividends/Federal and Provincial Tax Avoidance

Dennis AugerPartner, Tax

403.691.8385

[email protected]


Reporting Eligible Dividends

• The new dividend regime has received third reading• Since the Senate will not be sitting again until sometime

this month, the legislation will not receive Royal Assent until early 2007

• However, it will all be effective January 1, 2006, so that means for dividends paid in 2006 the corporation must determine if the dividend is eligible in order to notify the recipients in writing


Reporting Eligible Dividends

• Recall that the dividend payor has 90 days from the date of the dividend payment to notify the recipient in writing or 90 days from Royal Assent

• So for this year, since we do not have Royal Assent yet, you are effectively looking at making the notification on or before February 28, 2007, being the due date of the T5 reporting slips for 2006

• For 2006 there are now two sections for reporting dividends. Boxes 10, 11 and 12 are now for dividends other than eligible dividends and new boxes 25, 25 and 26 are for eligible dividends


Reporting Eligible Dividends— Non-CCPC

• Non-CCPC’s can pay an eligible dividend as long as they do NOT have a Low Rate Income Pool (LRIP)

• So a non-CCPC does not want a LRIP balance• Fortunately for a non-CCPC there is no opening balance

of LRIP• The 2006 calculation does have two prior year’s numbers:

preceding year’s investment income and preceding year’s small business income BUT only if you were a CCPC in 2005

• Also it is a corporation by corporation specific calculation—a corporation in which you have shares can have a LRIP but it does NOT form part of your LRIP unless that corporation pays you a non-eligible dividend


Reporting Eligible Dividends— Non-CCPC

• So what “rule of thumb” can we use? • If you have not been a CCPC for at least two years,

then you should not have generated any LRIP• If you received a dividend in 2006 from another corporation

and that corporation has not been a CCPC for at least two years, then their dividend could not have “tainted” your eligible dividends


Reporting Eligible Dividends— CCPC

• The CCPC’s of the world are going to have a more difficult time determining if they can pay an eligible dividend

• A CCPC can pay an eligible dividend only to the extent that they have a General Rate Income Pool (GRIP)

• A CCPC does want a GRIP balance• There is an opening balance of GRIP for a CCPC• The opening balance looks back to 2001 and accumulates

remaining income that was subject to general rate tax• So you need to figure out any opening balance and calculate

any 2006 addition to the end of your year


Reporting Eligible Dividends— Trusts

• Just a quick word on Trusts• Dividends received by a Trust and allocated to it’s beneficiary

are deemed to have been dividends received by the beneficiary• The Trust will get notification from the corporation paying the

dividend that the dividend is eligible• But there appears to be nothing in the legislation requiring the

Trust to notify the beneficiary when the dividend is distributed to the beneficiary, and therefore no 90 day rule


Reporting Eligible Dividends—Trusts

• Presumably when the Trust prepares it’s T3 slips it will be able to provide notification of eligible versus non-eligible dividends (much like the T5 slips we have already seen)

• But what about dividends received during the year and paid out to the beneficiary during the year

• There does not seem any requirement to notify beneficiaries during the year

• But some type of notification should probably be made so the beneficiary knows what impact the receipt might have on their various pools

• Perhaps much the same way ROC versus income disclosures are currently made, possibly on your website


Federal—Provincial Sub-Committee on Tax Avoidance

• There have been a number of recent moves by the provinces to combat or stop what they view as abusive inter-provincial tax planning

• Generally involves sourcing income to another province where the tax rate is lower or in some cases eliminating provincial tax altogether

• As a result of this there has been a number of steps takenboth provincially and federally



• Legislative changes have been introduced by the provinces to eliminate some of the inter-provincial tax planning

• More importantly there is currently an attempt at inter-provincial co-operation as it relates to the allocation of income/deductions amongst the provinces, such as– Federal—Provincial Sub-Committee on Tax Avoidance established

– Ontario recently finalized it’s New Tax Collection Agreement with the Federal government—Ontario corporations will now file one tax returns and the Federal government will collect tax for Ontario

– Alberta Finance announced in it’s December Tax Notes that Alberta has established a Tax Avoidance Team to identify and audit such plans

– The Federal government now requires inter-provincial considerations even on in-house loss utilization advance tax rulings



• The Federal Government last year also introduced an 18 month pilot project with Ontario Finance to– Include provincial income allocation as part of CRA audit

considerations

– CRA audit to focus on inter-company transactions, identification of provincial permanent establishments and reconciliation of the wages and revenue in the provincial allocation schedule

– Will assess penalties and interest if there is a misallocation between those provinces which have independent tax authorities, i.e. Alberta, Quebec and formerly Ontario

Financial Reporting Update

Murray SueyPartner, Audit

403.691.8474

[email protected]


Accounting for Taxes of Trusts—2006

• Issues being considered by EIC but process not yet complete• Previously most trusts did not provide for taxes on temporary

differences at the trust level if conditions in EIC 107 are satisfied• When tax changes are substantively enacted, many trusts will

be required to record additional future income taxes• As changes were not substantively enacted in 2006,

no accounting is required at this point


Accounting for Taxes of Trusts—2006

• Consider disclosure requirements from CICA 3465.99– Nature and extent of temporary differences for entities not providing

for taxes—would include most trusts/LPs

• Most trusts will be required to assess goodwill for impairment in Q4-2006. Market cap may be an indicator of fair value, but further analysis often required


Non-GAAP Financial Measures

CSA Staff Notice 52-306 issued in 2003 and revised in August 2006. Revisions focused on:

• Appropriate explanations for purpose and merits of disclosures• Inconsistent disclosures from period to period• Inappropriate exclusion of and inadequate discussion

of “non-recurring” amounts excluded• Lack of appropriate reconciliations• Clarified that distributable cash is a cash flow measure

and needs to be reconciled to cash flow from operating activities after changed in non-cash working capital


Certification of Design of Internal Controls

• September 2006 guidance issued on reporting when weaknesses exist– MD&A should include disclosure of nature of weakness,

associated risks, plans to remediate (if any)

– We expect many smaller issuers to disclose some weaknesses, such as lack of segregation of duties or lack of resources to address complex accounting requirements,

• Some indicators of weaknesses for smaller entities might include– Audit adjustments

– Prior period adjustments

– Lack of resources to apply complex accounting requirements, like hedging, VIE’s or future income taxes


US GAAP—SAB 108

Considering the Effect of Prior Year Differences when Quantifying Effect of Misstatements in Current Year (effective for 2006)

• Registrants required to quantify misstatements using both the balance sheet (iron curtain) method and income statement (rollover) method to assess if differences are material

• Clarifies that assessment of impact of differences is first an accounting requirement (management) and secondly an auditing requirement.

• Impact on CDN GAAP is unclear, but would be unusual to have a CDN/US GAAP difference due to materiality differences

• Tip of the day—record all known differences each period

Derivatives and Hedging Activities

John GordonPartner, Audit

403.691.8118

[email protected]



• New rules are effective for 2007 for the recognition and measurement of derivatives

• For existing hedges, documentation and analysis of effectiveness needs to be completed for last quarter of 2006, even if hedge accounting will not be followed for future periods

• MD&A should probably include disclosures of expected future accounting policy changes



• Certain analysis and actions required by January 1, 2007– Modify hedge documentation if hedge accounting to be continued.

2006 documentation probably will not cover all required matters

– Identify non-financial derivatives, such as fixed price physical contracts

– Identify embedded derivatives

– Prepare documentation for “expected usage” exemption where required

• Mark to market accounting would be required for all derivatives, including non-financial derivatives for prior to the preparation of the documentation



If hedge accounting not adopted for future periods• Balance sheet

– All derivatives recorded at fair value on balance sheet

• Income statement– Derivatives adjusted to fair value each period– Realized and unrealized amounts should be grouped together

• Cash flow statement– Expect that cash flows on settlements will be included

as operating activity– Unrealized gains and losses will be added back as non-cash item

• Expect most entities will add back before funds from operations amount


Contact Information

Contact details:

Craig [email protected] 403.691.8022

Dennis [email protected] 403.691.8385

Murray [email protected]

John [email protected]

Mailing Address for all:

KPMG LLP2700 205 5th Avenue SW Calgary, AlbertaT2P 4B9


kpmg.ca

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. © 2007 KPMG LLP, a Canadian limited liability partnership and a

member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

4 th Quarter Accounting, Reporting and Tax Update January 10, 2007 CONFERENCE CALL KPMG LLP.

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Transcript of 4 th Quarter Accounting, Reporting and Tax Update January 10, 2007 CONFERENCE CALL KPMG LLP.