Bank of Montreal 2004 Annual Report Download - page 37

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BMO Financial Group Annual Report 2004 33
MD&A
The provision for income taxes reflected in the Consolidated
Statement of Income is based upon transactions recorded in
income, regardless of when such transactions are subject to
income taxes, with the exception of the repatriation of retained
earnings from foreign subsidiaries, as outlined in Note 21 on
page 114 of the financial statements.
As explained on pages 26 and 28, BMO adjusts revenue to
a taxable equivalent basis for analysis, with an offsetting adjust-
ment to the provision for income taxes. As such, unless indicated
otherwise, the provision for income taxes and associated tax
rates are stated on a taxable equivalent basis in this MD&A.
On a taxable equivalent basis, the provision for income taxes
in the Consolidated Statement of Income was $1,147 million,
compared with $840 million in 2003. The increase was attrib-
utable to higher net income before income taxes, a higher
proportion of income from higher tax-rate jurisdictions and
the recognition of proportionately lower tax benefits in 2004,
as well as the impact on current income taxes of the Ontario
income tax rate increase in the first quarter. These factors
were partially offset by federal and Alberta income tax rate
decreases. On a taxable equivalent basis, the effective tax rate
was 32.2% in 2004 (31.7% excluding a $19 million future tax
adjustment in the first quarter), compared with 30.8% in 2003.
The components of variances between the effective and statu-
tory Canadian tax rates are outlined in Note 21 on page 114 of
the financial statements.
Excluding any special adjustments, we estimate that the
effective tax rate in 2005 will be 31% to 32% and consider that
rate to be sustainable.
BMO hedges the foreign exchange risk arising from our net
investment in our U.S. operations by funding the net invest-
ment in U.S. dollars. Under this program, the gain or loss on
hedging and the unrealized gain or loss on translation of the
net investment in U.S. operations are charged or credited
to retained earnings, but usually are approximately equal and
offsetting. For income tax purposes, the gain or loss on hedging
activities incurs an income tax charge or credit in the current
period, which is charged or credited to retained earnings;
however, the associated unrealized gain or loss on the net
investment in U.S. operations does not incur income taxes until
the investment is liquidated. The income tax charge/benefit
arising from a hedging gain/loss is a function of fluctuations
in exchange rates from period to period. The $710 million
gain on hedging our net investment in U.S. operations in 2004
was subject to an income tax charge in retained earnings of
$254 million. Refer to the Consolidated Statement of Changes
in Shareholders’ Equity on page 85 of the financial statements
for further details.
Table 8 on page 73 details the $1,717 million of total govern-
ment levies and taxes incurred by BMO in 2004.
Provision for Income Taxes