Question

The following are independent situations which occurred in CTC

e) A company properly uses the equity method to account for its 30% investment in another taxable Canadian corporation. The investee pays non-taxable dividends that are about 10% of its annual earnings.

f) Management determines that the net realizable value of the inventory is below cost, causing a write-down in the current year.

g) A company reports a contingent loss (ASPE) or provision (IFRS) that it expects will result from an ongoing lawsuit. The loss is not reported on the current year’s tax return. Half the loss is a penalty it expects to be charged by the courts. This portion of the loss is not a tax-deductible expenditure, even when it is paid.

h) The company uses the revaluation model for reporting its land and buildings. Due to current economic conditions, the fair value of the properties declined and the write- down was recorded against the revaluation surplus reported in equity.

Required: For each of the situations above:

1) Indicate whether it results in a reversing (timing) difference or a permanent difference in the year. Be sure to note any differences between ASPE and IFRS.

Answer 1

A. This is a situation of Permanent difference, here the difference between the tax according to ITAct and Accounting cannot be reversed because of the nature of the dividend.

Hence, it is a permanent difference.

2. There is a difference between Accounting income and taxaTax income because if the valuation of inventory. Hence the valuation can change the difference in the tax is also reversible , hence it is a Reversible or Timing difference.

3. Losses(ASPE) incurred due to lawsuit is a permanent difference. The loss can't be reversed.

In case of provision (IFRS) , the difference is temporary, because there is a possibility of reversal.

4. The revaluation surplus recorded gives rise to a permanent difference which can be reversed with the revaluation loss of the assets.