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

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Presentation on theme: "4 th Quarter Accounting, Reporting and Tax Update January 10, 2007 CONFERENCE CALL KPMG LLP."— Presentation transcript:

1 4 th Quarter Accounting, Reporting and Tax Update January 10, 2007 CONFERENCE CALL KPMG LLP

2 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 GordonIntroduction Craig NatlandTrusts: Permitted Normal Growth Dennis AugerReporting Eligible Dividends/Federal and Provincial Tax Avoidance Murray SueyFinancial Reporting Update John GordonDerivatives and Hedging Activities Continuing professional education credit: You may qualify for up to 2 hours of professional education credit by attending this event.

3 Draft Trust Legislation Craig Natland Partner, Tax

4 4 © 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. 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 (SIFTs) On December 15, 2006 the Department of Finance issued guidance on Undue Expansion –Safe Harbour and permitted transactions –Conversions of SIFTs 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 –SIFTs will not be able to deduct distributions of this income for tax purposes, and distributions by partnerships that are SIFTs will be taxed in the SIFT –Investors will be taxed as if the distributions were dividends

5 5 © 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. 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

6 6 © 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. Normal Growth During Transition Period (Cont'd) Department of Finance proposed the following safe harbour guidelines: PeriodNormal 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.

7 7 © 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. Normal Growth During Transition Period (Cont'd) Measured by issuance of new equity Based on market capitalizationOctober 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 Public Corporation (Alberta)32.12%32.12%30.5%30.0%29.0%28.5% SIFT - New0%34.0%33.5%33.0%32.0%31.5% Press Release available at:

8 8 © 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. 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

9 9 © 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. 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)

10 Reporting Eligible Dividends/Federal and Provincial Tax Avoidance Dennis Auger Partner, Tax

11 11 © 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. 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

12 12 © 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. 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

13 13 © 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. Reporting Eligible Dividends Non-CCPC Non-CCPCs 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 years numbers: preceding years investment income and preceding years small business income BUT only if you were a CCPC in 2005 Also it is a corporation by corporation specific calculationa 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

14 14 © 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. 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

15 15 © 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. Reporting Eligible Dividends CCPC The CCPCs 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

16 16 © 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. Reporting Eligible Dividends Trusts Just a quick word on Trusts Dividends received by a Trust and allocated to its 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

17 17 © 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. Reporting Eligible Dividends Trusts Presumably when the Trust prepares its 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

18 18 © 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. FederalProvincial 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

19 19 © 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. FederalProvincial 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 –FederalProvincial Sub-Committee on Tax Avoidance established –Ontario recently finalized its New Tax Collection Agreement with the Federal governmentOntario corporations will now file one tax returns and the Federal government will collect tax for Ontario –Alberta Finance announced in its 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

20 20 © 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. FederalProvincial 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

21 Financial Reporting Update Murray Suey Partner, Audit

22 22 © 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. Accounting for Taxes of Trusts2006 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

23 23 © 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. Accounting for Taxes of Trusts2006 Consider disclosure requirements from CICA –Nature and extent of temporary differences for entities not providing for taxeswould include most trusts/LPs Most trusts will be required to assess goodwill for impairment in Q Market cap may be an indicator of fair value, but further analysis often required

24 24 © 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. Non-GAAP Financial Measures CSA Staff Notice issued in 2003 and revised in August 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

25 25 © 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. 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, VIEs or future income taxes

26 26 © 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. US GAAPSAB 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 dayrecord all known differences each period

27 Derivatives and Hedging Activities John Gordon Partner, Audit

28 28 © 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. 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

29 29 © 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. Derivatives and Hedging Activities Certain analysis and actions required by January 1, 2007 –Modify hedge documentation if hedge accounting to be continued 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

30 30 © 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. 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

31 31 © 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. Contact Information Contact details: Craig Natland Dennis Auger Murray Suey John Gordon Mailing Address for all: KPMG LLP th Avenue SW Calgary, Alberta T2P 4B9

32 32 © 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. 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.


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