You were recently promoted to senior accountant at Y&G Partners Ltd. A new junior accountant has joined your team. He has noted the following questions after reviewing various company records:

1. A company reports a tax loss of $50,000 after claiming CCA of $300,000. This company had taxable income available in the carryback period against which the loss could be offset so claiming the CCA makes sense. What if the company did not have any taxable income in the prior three years and the expectation for earning positive income in the future was uncertain? What would the company likely do as a tax strategy and why?

2. A company reported earnings of $520,000 in 20X5. The company has $60,000 of depreciation expense this year and claimed CCA of $120,000. The tax rate was 26%. At the end of 20X4, there was a $120,000 loss carryforward that was not recorded because use was considered less than probable. The company also reported a deferred tax liability of $60,000 caused by capital assets with a net book value of $1,200,000 and UCC of $900,000. The tax rate had been 20% in 20X4. What is the income tax expense made up of in 20X5?

3. A company called Bertino made a policy choice to use a valuation allowance rather than directly increasing or decreasing the balance of the deferred income tax asset caused by a loss carryforward. Is this policy also allowed under ASPE? What impact does it have on the SFP? The junior accountant had never seen accounting treatment like this, and it seemed unusual.

4. Tax rates tend to change frequently. When a company records a deferred tax asset relating to a tax loss carryforward, it is calculated at the substantially enacted rate. What if that rate changes? What would be the impact? Let’s say a company records the tax benefit of $370,000 accumulated tax loss carryforwards when the tax rate is 38%. The deferred income tax asset would be $140,600. What if the tax rate increases by 2% or decreases by 2% before the company is able to use any of the carryforward?

Required:
Answer the junior accountant’s questions by explaining the income tax impacts of each of the above.