Air Canada 2007 Annual Report Download - page 105

Consolidated Financial Statements and Notes
105
9. FUTURE INCOME TAXES
The following income tax related amounts appear in the Corporation’s Consolidated statement of fi nancial position:
2007 2006
Future income tax asset recorded in current assets (a) $ - $ 345
Current tax payable (a) $ - $ (345 )
Long-term tax payable (a) $ (10 ) $ -
Future income tax liability (c) $ (88 ) $ (134 )
a) Current Taxes Payable
As part of a tax loss utilization strategy that was planned in conjunction with the initial public offering of Air Canada and
corporate restructuring, a current tax payable of $345 was created in 2006. This tax payable arose upon a transaction to
transfer tax assets from Air Canada to ACE. This tax payable was recoverable from future income tax assets of Air Canada
and was settled in 2007. The Corporation recorded current tax expense of $6 in 2007, which was related to the interest on
the tax balance prior to its recovery.
During 2007, Air Canada recorded a current income tax expense of $10 resulting from the Federal and Ontario harmonization
of corporate taxes. Air Canada will have a cash tax payable of $10 that will be payable over a fi ve year period beginning in
2009. This amount is included in Other long-term liabilities.
b) Valuation Allowance
The Corporation has determined that it is more likely than not that future income tax assets of $843 are not recoverable
and have been offset by a valuation allowance. However, the future tax deductions underlying the future tax assets remain
available for use in the future to reduce taxable income.
Subsequent to the completion of the Air Canada IPO in 2006, the future income tax accounting of Air Canada is independent
from ACE, and as such, Air Canada’s intangible assets and shareholders’ equity are not affected by ACE accounting events.
For periods subsequent to the Air Canada IPO, the benefi t of future income tax assets that existed at fresh start, and for
which a valuation allowance is recorded, is recognized fi rst to reduce to nil any remaining intangible assets (on a pro-rata
basis) that were recorded upon fresh start reporting. The benefi t of future income tax assets that arise after fresh start are
recognized in the income statement.
Prior to the completion of the Air Canada IPO in 2006, it was determined that a portion of valuation allowance recorded
by ACE should be reversed as it was more likely than not that certain future income tax assets of $504, which a valuation
allowance had been recorded against at the time of fresh start reporting, would be realized. Consistent with the income tax
accounting policy of Air Canada while it was wholly owned by ACE, the reversal of the valuation allowance by ACE resulted
in a reduction of Air Canada’s intangible assets (on a pro-rata basis) of $374 in 2006.
For periods when Air Canada was wholly owned by ACE, the benefi t of future income tax assets that existed at fresh
start, including the benefi t recognized by affi liates of the Corporation, and for which the valuation allowance has been
reversed, are recognized on a pro rata basis as a reduction of intangible assets of the Corporation and a debit or credit to
shareholders’ equity. The pro rata allocation of the reversal of the valuation allowance was based on the aggregate carrying
value of intangible assets of the Corporation and other entities of ACE on the basis that under the plan of arrangement
under the Companies’ Creditors Arrangement Act, these intangible assets were transferred to the other entities from Air
Canada. The accumulated debit to shareholders’ equity as at December 31, 2006 was $291.
As described in Note 3, the income of certain inter-company investments held by Air Canada is excluded from these
consolidated fi nancial statements. The income from these investments resulted in the utilization of non-capital losses
carried forward of Air Canada and, as a result, the related future income tax expense was charged to shareholders’ equity.
The accumulated debit to shareholders’ equity as at December 31, 2006 was $282.