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IAS 12 is the international accounting standard for income taxes. It tells a company to record two things: the tax it owes on this year’s taxable profit (current tax) and the tax it will pay or save later because books and tax returns treat assets and liabilities differently (deferred tax). It’s an accounting rule for financial statements, not a tax law. Nothing in it changes what you owe the CRA.
Who has to follow IAS 12?
Companies that report under IFRS Accounting Standards. If you run a small private corporation and your accountant prepares your statements under Canada’s private enterprise standards, you’ll meet Section 3465 of the Accounting Standards for Private Enterprises (ASPE) instead. That section lets you pick a method. Under the taxes payable method you expense only the current tax for the year. Under the future income taxes method you also record the deferred piece.
Which one is in use matters when a lender or buyer reads your statements. Two identical firms can show different profit after tax if they chose differently. Which standard applies to your specific company isn’t something a web page can tell you, so ask whoever signs your financial statements.
What is a temporary difference?
It’s the gap between an asset or liability’s carrying amount on the balance sheet and its tax base, the amount the tax rules assign to it. The standard builds everything on that gap. Where the gap will make future taxable income higher, you record a deferred tax liability. Where it will make future taxable income lower, you record a deferred tax asset, and you can also record one for unused tax losses.
Deferred tax liabilities generally arise where tax relief is provided in advance of an accounting expense.
Deferred tax, Wikipedia (Wikipedia, CC BY-SA), wikipedia.org
There’s a condition on the asset side. A deferred tax asset is recognised only to the extent it’s probable that future taxable profit will be there to use it. A company that keeps losing money has a hard time justifying one.
| Situation | Usual effect |
|---|---|
| Tax deduction taken faster than book depreciation | Deferred tax liability |
| Expense booked now, deductible later | Deferred tax asset |
| Unused tax loss carried forward | Deferred tax asset, if profit is probable |
How does a deferred tax liability work in numbers?
These inputs are made up to show the mechanics. The tax rate is what our corporate tax calculator gives for an Ontario corporation that isn’t using the small business rate: 26.5%, federal and provincial combined.
Say a company buys equipment for $100,000. Its books depreciate $20,000 in year one, so the carrying amount is $80,000. For tax, it claims $40,000, so the tax base is $60,000. The temporary difference is $20,000, and $20,000 at 26.5% is a $5,300 deferred tax liability.
Now add the year’s taxable income. Suppose it’s $600,000. Current tax at 26.5% is $159,000. Total income tax expense in the statements is $159,000 plus $5,300, which is $164,300. The $5,300 isn’t payable this year. It reverses as the book depreciation catches up with the tax deductions.
Follow the same equipment to the end of its life. Once the books have depreciated it to zero and the tax side has claimed all $100,000, the carrying amount and the tax base are both nil. The gap is gone, and so is the liability. All that happened is that some tax was paid later in the books than on the return, and then evened out.
What does a deferred tax asset look like?
Flip the picture. A company books a $50,000 warranty expense this year, but the tax rules only let it deduct the cost when it actually pays a claim. The liability on the books is $50,000 and its tax base is nil, so the temporary difference is $50,000. At the same 26.5%, that’s a $13,250 deferred tax asset, as long as it’s probable the company will earn enough taxable profit later to use the deduction.
If the business has been losing money for three years, an auditor will want to see evidence beyond hope. A signed contract or a profitable order book carries more weight than a forecast.
What do people get wrong about IAS 12?
The biggest mistake is treating deferred tax as a bill. It isn’t due anywhere, and it won’t show on a notice of assessment. Another is forgetting that a deferred tax asset needs evidence of future profit, and “we expect to do better next year” isn’t much evidence.
In 2021 the standard was amended so the recognition exemption for some items no longer applies when a transaction creates equal taxable and deductible temporary differences. If your business has leases or decommissioning obligations, ask how that applies to you. We haven’t tested it against any particular case.
Owners also mix this up with personal tax. Deferred tax in a company’s statements has no link to your own return, where the dividend tax calculator and the capital gains tax calculator do the work. To see whether a product earns its keep before any tax, the profit margin calculator is the quicker tool.
Where this information comes from
IAS 12 Income Taxes is published by the IFRS Foundation. ASPE Section 3465 comes from the Accounting Standards Board of Canada, and CPA Canada publishes the handbook. The corporate rate in the example is from our calculator’s 2026 data, which hedges the Ontario small business rate because it’s a blend and not a published figure. The equipment and warranty numbers are invented. Read the standard itself, or ask your accountant, before you apply any of this.
Frequently asked questions
What does IAS 12 cover?
It sets out how to account for income taxes in financial statements under IFRS Accounting Standards, including current tax and deferred tax.
Does IAS 12 change how much tax I pay the CRA?
No. It is an accounting standard. Your tax bill comes from the Income Tax Act and your return.
What is a temporary difference?
The difference between an asset or liability's carrying amount on the balance sheet and its tax base. Deferred tax is recorded on that difference.
What do Canadian private companies use instead?
Many follow ASPE Section 3465, which allows either the taxes payable method or the future income taxes method.
When can a company record a deferred tax asset?
To the extent it is probable that future taxable profit will be available to use it.
- How Canadian income tax works: brackets and credits
How federal and provincial Canadian income tax stack up, what marginal and average rates mean, and how credits and deductions change your bill