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Ontario corporate tax rate frozen at 11.5%


Canadian tax alert, June 21, 2012

Ontario’s budget bill, Bill 55, passed third reading and received Royal Assent in the Ontario Legislative Assembly on June 20, 2012. Subsequently, Bill 114, which contained the anticipated corporate income tax rate freeze, was introduced, read three times, passed and received Royal Assent as S.O. 2012 C.9. Consequently, the corporate income tax rate remains at 11.5%. 

Tax accounting implications

Since Bill 114 to implement the corporate tax rate freeze is now law, clients with permanent establishments in Ontario will be subject to a tax rate increase for fiscal 2012 on their current earnings and a tax rate increase to their deferred taxes. Consequently, for IFRS and US GAAP purposes, it will be necessary to recognize the tax accounting consequences in Q2 for calendar year companies. 

Interim period implications

Interim period accounting for IFRS and US GAAP requires the estimation of an average annual effective tax rate (AETR) to determine tax expense, which is then adjusted for discrete items to arrive at the total tax expense for the interim period.  When a tax rate change is substantively enacted (IFRS) and enacted (US GAAP) during an interim period and it changes the applicable tax rate to current earnings, the AETR should be re-estimated to take into account the change in the tax rate. For deferred taxes, the change in the tax rate requires the deferred taxes to be re-determined.  For IFRS purposes, this change in deferred taxes may be included in the AETR or recorded as a discrete item in accordance with the company’s policy.

US GAAP requires the change in a tax law to be reflected in the computation of the global AETR in the first interim period that includes the enactment date of the new legislation. Thus, a new computation of the global AETR is required in order to determine the impact of the new tax rate for the current interim period. However, US GAAP also mandates that the effect of a change in tax laws or rates on a deferred tax liability or asset not be apportioned among interim periods through an adjustment of the global AETR. For US GAAP purposes, the full impact of the change in tax laws or rates on the deferred tax balance should be fully recognized as a discrete item in the interim period the change in tax laws became enacted.

Arthur Driedger, Toronto


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