CONFERENCE CALL
4th Quarter Accounting,
Reporting and Tax Update
January 10, 2007
KPMG LLP
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.
© 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.
2
Draft Trust Legislation
Craig Natland
Partner, Tax
403.691.8022
cnatland@kpmg.ca
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
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affiliated with KPMG International, a Swiss cooperative. All rights reserved.
4
“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
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affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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“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.
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affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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“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
Public Corporation (Alberta) 32.12%
SIFT - New
0%
2007
32.12%
34.0%
2008
30.5%
33.5%
2009
30.0%
33.0%
2010
29.0%
32.0%
2011
28.5%
31.5%
• Press Release available at:
http://www.fin.gc.ca/news06/06-082e.html
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affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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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
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affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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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)
© 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.
9
Reporting Eligible Dividends/Federal
and Provincial Tax Avoidance
Dennis Auger
Partner, Tax
403.691.8385
dauger@kpmg.ca
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
© 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.
11
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
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affiliated with KPMG International, a Swiss cooperative. All rights reserved.
12
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
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affiliated with KPMG International, a Swiss cooperative. All rights reserved.
13
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
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affiliated with KPMG International, a Swiss cooperative. All rights reserved.
14
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
© 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.
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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
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affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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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
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affiliated with KPMG International, a Swiss cooperative. All rights reserved.
17
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 taken
both provincially and federally
© 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.
18
Federal—Provincial Sub-Committee
on Tax Avoidance
• 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
© 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.
19
Federal—Provincial Sub-Committee
on Tax Avoidance
• 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
© 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.
20
Financial Reporting Update
Murray Suey
Partner, Audit
403.691.8474
msuey@kpmg.ca
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
© 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.
22
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
© 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.
23
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
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affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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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
© 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.
25
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
© 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.
26
Derivatives and Hedging Activities
John Gordon
Partner, Audit
403.691.8118
johngordon@kpmg.ca
Derivatives and Hedging Activities
• 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
© 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.
28
Derivatives and Hedging Activities
• 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
© 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.
29
Derivatives and Hedging Activities
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
© 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.
30
Contact Information
Contact details:
Craig Natland
CNatland@KPMG.CA
403.691.8022
Mailing Address for all:
KPMG LLP
2700 205 5th Avenue SW
Calgary, Alberta
T2P 4B9
Dennis Auger
DAuger@KPMG.CA
403.691.8385
Murray Suey
MSuey@KPMG.CA
403.691.8474
John Gordon
JohnGordon@KPMG.CA
403.691.8118
© 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.
31
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