FEI Canada Accounting & Finance Review

Canada News

AcSB’s Financial Instruments Working Group issues Implementation Guidance

The Financial Instruments Working Group (FIWG) of the Accounting Standards Board (AcSB) has issued for comment implementation guidance for applying the CICA Handbook – Accounting standards on financial instruments.

This Implementation Guidance has not been reviewed by the AcSB and is not a primary source of generally accepted accounting principles. However, it is a source that an entity might consult to assist in selecting accounting policies. These documents are intended to clarify certain aspects of the standards.

The guidance has been published in stages, with Steps 4-6 now open for comment. These steps address subsequent measurement, income recognition, presentation and disclosure, and hedge accounting.

To read the full document, please see here.

Comments will be received until March 31, 2007. Please forward all comments to:

Kate Ward, CA
Secretary, Financial Instruments Working Group
277 Wellington Street West
Toronto ON M5V 3H2
ed.accounting@cica.ca


From the News Desk of
BRENDAN MOORE		 Brendan Moore

British Columbia Budget

February 20, 2007

Under the title "Building a Housing Legacy", Finance Minister Carole Taylor presented her fourth consecutive balanced budget to the British Columbia legislature on February 20, 2007. The 2007-2008 Budget announced a number of housing related initiatives aimed at assisting the homeless, first-time buyers and home owners, as well as income tax cuts for individuals earning up to $100,000 per annum.

Changes to the social service tax were a combination of policy changes and changes resulting from the year-long review of the social service tax involving extensive consultation with small business, industry and individuals. The changes were many and varied, and include a reduction in the audit and refund periods from six years to four years. The changes announced, including the commitment to future consultations on specific matters, are listed below.

  1. PST relief for new hybrid electric vehicles is extended to March 31, 2011.
  2. The PST exemption for energy efficient furnaces, heat pumps and storm windows and doors is restructured as follows:
    1. gas-fired forced-air furnaces remain eligible for the exemption if purchased before January 1, 2008;
    2. oil-fired forced-air furnaces listed as ENERGY STAR® Qualified are eligible for an exemption if purchased or leased on or after February 21, 2007 and before April 1, 2009;
    3. oil-fired forced-air furnaces that have a Seasonal Energy Utilization Efficiency (SEUE) rating of at least 85%, but may not be ENERGY STAR® Qualified, will remain eligible for the exemption if purchased before April 1, 2007;
    4. boilers, air-source heat pumps and ground-source heat pumps will remain eligible for the exemption if purchased before April 1, 2009;
    5. the exemption for storm windows, storm doors and multiglazed products is now limited to pre-manufactured windows, doors and skylights that are ENERGY STAR® Qualified products and that are purchased before April 1, 2009.
  3. The fuel tax exemption for the biodiesel portion of biodiesel blends is extended to any proportion of blend, and propane used by farmers in farm equipment, tractors and family farm trucks, may now be purchased tax-exempt.
  4. The due date for monthly SST returns is extended to the 23rd of the month from the 15th effective April 1, 2007; payments are now only considered to be on time if received by the Ministry on or before the due date.
  5. Businesses with annual tax remittances of $12,000 or less (up from $8,400) may qualify for quarterly, semi-annual or annual reporting frequencies, depending on the amount of tax remitted, the nature of the business and compliance history:
    • Businesses remitting $3,000 or less in tax annually may be eligible to file tax returns and payments quarterly, semi-annually or annually.
    • Businesses remitting from $3,001 to $6,000 in tax annually may be eligible to file tax returns and payments quarterly or semi-annually.
    • Businesses remitting from $6,001 to $12,000 in tax annually may be eligible to file tax returns and payments quarterly or monthly.
  6. Audit assessment periods are reduced from six to four years. All assessments issued on or after February 21, 2007 will be limited to four years including assessments related to audits that started prior to February 2007 for which an assessment has not been issued.
  7. Refund application periods are reduced from six to four years effective May 1, 2007. Refund claims must be received by the Ministry by April 30, 2007 in order to qualify for the six year period.
  8. The records retention period is reduced from seven years to five.
  9. Effective February 21, 2007, the audit assessment period of liquor licensees for variances between the amount of tax remitted on liquor sales and the amount of tax expected based on liquor purchases is reduced from a six years to a maximum three year period.
  10. Over the next year, the government will consult with the business community to develop proposals for modernized audit sampling techniques to enhance the objectivity and fairness of the audit process.
  11. A new $10,000 registration and collection threshold for small vendors is introduced.
  12. Effective February 21, 2007, the PST exemption for production machinery and equipment used exclusively in the exploration for, discovery of, or development of petroleum or natural gas is expanded to include certain portable mounted equipment, but not the automotive unit itself.
  13. Effective February 21, 2007, emergency roadside tire changing services for motor vehicles are exempt from PST. Previously, tire changing services were the only emergency roadside service subject to tax.
  14. Effective February 21, 2007, prescription medications provided for promotional purposes by pharmaceutical companies to a physician, dentist or veterinarian are exempt from PST.
  15. Registered charities and members of the British Columbia Association of Health-Care Auxiliaries qualify for a refund of tax paid on purchases of medical equipment made on or after February 21, 2007.
  16. The value of a manufacturer’s rebate is now excluded from the taxable purchase price of a motor vehicle if the manufacturer provides the rebate to the seller (dealer) of the vehicle as a condition of the sale. This concession ensures that the person who purchases that vehicle does not pay tax on the amount of the rebate and only pays tax on the amount that actually paid for the motor vehicle.
  17. Over the next year, consultations will take place with the farming industry to simplify and streamline the farming exemptions for both farmers and retailers.
  18. Effective February 21, 2007, the Social Service Tax Act is amended to clarify that grain, mill and other agricultural feeds and seeds are exempt when purchased and used solely for an agricultural purpose.
  19. In consultation with industry, a special registration permit system will be designed to replace the exemption form currently used by businesses eligible for the production machinery and equipment exemption. This special registration permit system will also replace the refund system on purchases of goods for use out of province. The special permits will reduce the administrative burden for many retailers and businesses.
  20. The exemption for catalysts and direct agents to be expanded to meet the tests laid out in the Domtar decision.
  21. Suppliers of equipment in an exempt rental inventory with an operator will only now be required to remit tax on the normal lease cost, instead of the full depreciated cost.

Further consultations will be undertaken:

  1. with the construction industry and persons repairing real property fixtures, to simplify SST rules as they apply to real versus tangible personal property,
  2. with business, to address issues regarding the transfer of partnership assets,
  3. to develop guidelines on the application of SST to asset transfers involving trusts and amalgamations,
  4. with the oil and gas industry, to review the current interpretation of the meaning of the term "well head", and
  5. with industry to simplify and clarify the exemption related to work-related safety equipment.

A full description of these and other measures resulting from the PST review can be found in the Ministry of Small Business and Revenue Budget Bulletin 2007 on the Ministry’s website at:

http://www.sbr.gov.bc.ca/budget/BudgetBulletin.pdf

The Quebec Budget

February 20, 2007

In what might be considered something of a ‘phantom’ budget, Minister of Finance Michel Audet presented the Quebec budget for 2007-2008 on February 20, 2007, against the backdrop of an impending Quebec election. Increased spending was announced in the areas of health, education and infrastructure, with more income tax cuts promised, including retirement income splitting and a substantial reduction in the rate of corporate income tax applied to passive income. While policy decisions enshrined in this budget may or may not survive the next election, technical changes presented in it are more likely to see enactment. From a commodity tax standpoint, the only policy changes were green in nature, increasing the refund of QST paid on hybrid vehicles. The balance of the changes harmonized with already announced federal changes to exempt midwifery services and to provide for standardized accounting. Further spending is committed to combat tax evasion and improve collection of tax debts.

QST Changes

Effective for vehicles purchased or leased after February 20, 2007 and before January 1, 2009, a purchaser or person that takes out a long-term lease of a new hybrid vehicle may receive a refund of up to $2,000 (up from the current $1,000) of the QST paid. A lessee may claim the refund when the tax is paid or at the conclusion of the lease, as at present, but, additionally, may obtain a refund of the first $1,000 of tax as soon as it is paid. There is an overall time limit of four years from the purchase or conclusion of the lease to make the claim. QST registrants remain excluded from the refund.

On December 28, 2006 the federal Finance Minister announced a GST exemption for services supplied by a midwife after that date. With this budget, Quebec will extend a similar exemption from the same date, once the federal legislation is enacted.

On January 26, 2007, the federal Department of Finance announced the imposition of new GST allocation rules for financial institutions. Since the supply of financial services is zero-rated under the QST system, similar concerns over allocation of QST paid between taxable and exempt supplies do not arise, and no harmonization with the federal changes is necessary.

Finally, Quebec announced that consequential changes would be made to harmonize with similar changes that arise in the federal system as the result of replacing the 6% penalty with an additional 4% of interest under the standardized accounting changes scheduled to take place April 2007.

From the News Desk of
WATSON WYATT

Federal Government Introduces Proposed Improvements to Application of GST/HST to Pension Plans

On January 26, 2007, the Federal Government released draft legislation aimed at improving and streamlining the application of the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) to a number of financial services, including pension plans. The legislation will address GST/HST advantages that currently exist in favour of imported financial services over comparable domestic services. Finance Minister Jim Flaherty stressed the importance of the financial services sector to Canada’s economy and stated that "[E]nsuring that the tax system functions smoothly and fairly in relation to it will support its continued success both at home and abroad. This ultimately benefits consumers and the Canadian economy".

The draft legislation proposes the following:

GST/HST Rebates for Pension Plan Trusts

Of particular interest to pension plan administrators is the proposed streamlining of the application of GST/HST to pension plan trusts. Ordinarily, employers engaged in commercial activities are entitled to claim Income Tax Credits (ITCs) in order to recover GST/HST paid on expenses. However, where a pension plan trust is established to provide employee pension benefits, the employer is not entitled to ITCs to recover GST/HST paid on expenses related to the activities of the trust.

Under the current GST/HST legislation, pension plan trusts are considered as a "separate person" from an employer and treated as a financial institution. To the extent that a pension plan trust provides exempt financial services in managing investments and issuing payments, it cannot recover GST/HST costs on expenses.

Employers are entitled to claim ITCs for eligible expenses incurred with respect to the establishment and administration of the pension plan trust. The eligible expenses include expenses related to the collection of pension plan contributions, the payment of plan benefits, and the maintenance of plan records.

Claims by Multi-Employer Pension Plan Trusts

Pursuant to the Excise Tax Act (ETA), Multi-Employer Pension Plan trusts (MEPPs) are entitled to claim 33% of the GST/HST paid on their expenses.

Proposed Common Treatment for Entitlement to ITCs

In its January 26 Backgrounder, the government states that it "recognizes the need to more generally address the issues concerning pension trust entitlement to ITCs and provide a common treatment for all pension trusts to ensure that the full benefits of pension plan GST/HST relief accrue to pension trusts so that they can better provide benefits to pensioners." In order to meet this goal, the government proposes replacing the current ITC and rebate systems for pension plan trusts with a single rebate system for all employer-sponsored pension trusts. The proposed new rebate would be made available for GST/HST paid on any expenses relating to pension plans.

The key features of the proposed rebate are as follows:

Employers engaged in commercial activities would become entitled to claim ITCs in respect of all taxable inputs they use in relation to pension plans but will also be deemed to have made taxable supplies of all the eligible inputs to the pension trust. The pension trust will be deemed to have paid the GST/HST with respect to the taxable supplies, and the employer will be deemed to have collected it. The government will consider the employer’s ITCs cancelled and will allow the pension trust to claim a rebate on the relevant expenses.

Analysis

The lack of a single set of GST/HST rules governing pension plan trusts allows some plans to obtain relief based on legislation and CRA administrative policy while others benefit from a rebate provided in the legislation. The proposed regulations will be a positive step towards a uniform treatment of the application of GST/HST to pension plan trusts. Pension plan administrators, employers and plan members should make themselves aware of the current status of their plans and be prepared for any changes that may result from the final regulations.

Future Developments

The Department of Finance is seeking input from interested parties and industry stakeholders on the proposed regulations. The government has announced plans to meet with industry insiders in March, 2007 in order to discuss concerns and potential problems with the proposed legislation. Comments on the proposed regulations must be submitted to the Sales Tax Division of the Department of Finance by April 30, 2007.

International News

FASB Issues Statement on Fair Value Option for Financial Assets and Financial Liabilities

The Financial Accounting Standards Board (FASB) has issued its statement on Fair Value Option for Financial Assets and Financial Liabilities.

Under the new Statement eligible items for the measurement option include:

The fair value option may be applied instrument by instrument, with a few exceptions, is irrevocable (unless a new election date occurs) and is applied only to entire instruments.

The FASB fair value option is similar, but not identical, to IAS 39, Financial Instruments: Recognition and Measurement.

The effective date is the first fiscal year that begins after November 15, 2007. Early adoption is permitted.

For more details, please see here.

From the News Desk of
KPMG

 KPMG

Results of KPMG global cost study provide a roadmap for Canadian industry to improve profitability

The vast majority of organizations today are missing out on major opportunities to boost profits because of their inattention to cost reduction, according to the results of a global study initiated by KPMG LLP.

The research study, entitled: Rethinking Cost Structures: Creating a sustainable cost advantage was conducted by the Economist Intelligence Unit (EIU) on behalf of KPMG International and was based on the replies of 427 senior executives, half of which were C-level, representing a cross section of industries and large, mid-size and small organizations.

As profits and revenues rise, companies increasingly lose some of their focus when it comes to controlling costs, according to the 427 senior executives questioned by the EIU. Nearly half of all the organizations admitted that they did not know what drives costs and profitability at a business unit level. In addition:

"These results serve as a timely wakeup call for executives," said Diane Jeffreys, KPMG's National Service Line Leader for Operations Improvement in Canada. "Executives around the world admit that companies experiencing higher growth place a lower priority on cost control. For these companies, high profits and revenues may be masking an unnecessarily inflated cost base that could leave a company at risk of hostile takeover."

Visit KPMG's Web site to view a multimedia presentation of the report's key findings and to download a pdf copy of the report.

From the News Desk of
IBM

Five Tips for Companies Looking to Fund Innovation in 2007

It’s that time again, as companies – large and small - develop and deploy strategies to simultaneously manage costs and fund their growth initiatives for the coming year. For the most part, these two activities are not mutually exclusive, since monies saved from effectively managing a company’s cost structures can be applied to new technology or business transformation initiatives. IBM Chairman and CEO Sam Palmisano sums it up when he says, "CEOs have to drive growth and cut costs at the same time. I know only one way to do that. It's called innovation."

But for many C-level executives, accessing innovation might be easier said than done. While innovation certainly can be a hedge against competition, the global realities are that capital to fund such innovation is scarce. In a recent IBM-conducted survey of 765 CEOs across the globe it was found that limited funding for investment was the second biggest inhibitor to driving innovation. IBM Global Financing has identified five strategies that companies looking to fund innovation in 2007 can leverage. Click here to read the full article.

IFRS Update

FEI Canada Launches IFRS Resource Centre

In an effort to help our members stay up-to-date on IFRS developments, and to provide them with a central reference point for information on the conversion process, FEI Canada has begun an IFRS Resource Centre.

A work in progress, this section of the FEI Canada website will include recent announcements from the IASB and the AcSB, industry-specific overviews of the impact of IFRS, tools and other resources to use in the conversion process, and analysis of the conversion process from our strategic partners and other thought leaders in the area of IFRS.

The IFRS Resource Centre will be updated as new information becomes available. We also encourage you to pass along any information you may have come across that would be of use to your colleagues.

Your feedback on the site is greatly encouraged. As it grows, we anticipate that it will change and become more dynamic.

Please click here for the IFRS Resource Centre.

Please send any comments, suggestions and/or resources to shogan@feicanada.org.

Hot Topics from IPAC

IPAC Asks Ontario for Same Pension Solvency Funding Provided by Federal Government

On February 20, the Issues and Policy Advisory Committee (IPAC) of FEI Canada wrote to the Honourable Greg Sorbara, Ontario’s Minister of Finance, to ask that the government provide, by way of regulatory relief, the same solvency funding standard provided to federally regulated defined benefit pension plans.

IPAC notes that the onerous five year funding requirement on solvency deficiencies, as defined under the Pension Benefits Act, is a burden on many sponsors of Ontario’s defined benefit pension plans and in some cases has further prompted conversions to defined contribution plans. These sponsors need this immediate relief while the province’s expert Commission solicits inputs for preparation, prior to its recommendations, on ways to preserve the sustainability of Ontario’s pension system. Many of these pension plan sponsors are in the manufacturing sector and contending with difficult adjustments to the changed economic realities in the province.

IPAC urges the government to act in a timely manner on this funding crisis, as has the federal government and before it the Quebec government.

IPAC Once Again Participates in Pre-Budget Consultations

IPAC has once again submitted its comments to the Federal Minister of Finance, Jim Flaherty, its comments for the government’s consideration in the pre-budget consultation process.

The proposals address some of the key taxation and education issues of concern to FEI Canada’s membership. If implemented they would (i) assist Canadian corporations and the government as they endeavour to improve Canada’s environmental performance, (ii) enhance the domestic and international competitiveness of Canadian corporations, (iii) improve the cash flow of many Canadian corporations, thus enabling firms of all sizes to reinvest more after-tax funds in capital and productivity enhancements, and (iv) alleviate a pressing problem related to the acquisition of timely and cost-effective continuing education by Canadian corporations and their employees. Furthermore, these targeted initiatives are either (i) sustainable given the healthy forecast federal surplus position, (ii) revenue neutral over the near to medium term, or (iii) are relatively negligible in terms of foregone tax revenues.

The recommendations address: corporate tax rates, income trusts, environmentally friendly capital investments, harmonization, minimum tax threshold, withholding on interest and dividends, corporate group tax reporting, personal taxation thresholds, retirement planning and workplace training.

To read the full submission, please see here.

In This Issue

Canada News
International News
IFRS Update
Hot Topics From IPAC