Deferred tax is an accounting item reflecting timing differences between when income or expenses are recognised for accounting versus for tax, creating future tax assets or liabilities.
Deferred tax arises because accounting rules and tax rules recognise some items in different periods. A common cause is depreciation: book depreciation and tax capital cost allowance differ, so the tax actually paid differs from the tax the accounting profit implies. The difference is recorded as a deferred tax liability (tax to be paid later) or asset (tax benefit to come).
Deferred tax is a financial-reporting concept under IFRS and ASPE, not a separate tax you pay to the CRA. It reconciles the tax expense on the income statement with the reality that book and taxable income diverge, and it can be significant for asset-heavy businesses.
A company claims more CCA than book depreciation early on, so it pays less tax now than its accounting profit suggests. The gap is recorded as a deferred tax liability, reflecting tax expected to be paid in later years.
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