Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

9.     Income Taxes

The expense for the year can be reconciled to income before income taxes as follows:

Year ended December 31,	2022			2021			2020
Earnings before income tax	$	405,988		$	205,232		$	235,888
Statutory federal and provincial tax rate in British Columbia, Canada		27.00	%		27.00	%		27.00	%
Expected income tax expense	$	109,617		$	55,413		$	63,690
Non-deductible expenses		7,978			7,853			4,732
Non-taxable gain on capital items		(19,457)			(265)			(60)
Changes in the valuation of deferred tax assets		(2,302)			(355)			(2,027)
Different tax rates of subsidiaries operating in foreign jurisdictions		(6,394)			(6,257)			(12,016)
U.S. tax reform impacts		7			3,584			17,105
Deductions for tax purposes in excess of accounting expenses		(754)			(2,698)			(1,566)
Unrecognized tax benefits		(1,476)			(474)			817
Benefits of deductible stock options		(1,518)			(2,121)			(4,070)
Expired losses with full valuation allowance		689			620			725
Other		(160)			(1,922)			(1,800)
	$	86,230		$	53,378		$	65,530

The income tax expense (recovery) consists of:

Year ended December 31,	2022		2021		2020
Canadian:
Current tax expense	$	60,897	$	21,664	$	27,766
Deferred tax expense		2,725		5,639		3,970
Foreign:
Current tax expense before application of operating loss carryforwards		29,573		30,093		30,280
Tax benefit of operating loss carryforwards		(3,987)		(2,238)		(1,668)
Total current tax expense		25,586		27,855		28,612
Deferred tax expense before adjustment
to opening valuation allowance		(2,978)		(1,781)		6,127
Adjustment to opening valuation allowance		—		1		(945)
Total deferred tax (recovery) expense		(2,978)		(1,780)		5,182
	$	86,230	$	53,378	$	65,530

The foreign provision for income taxes is based on foreign pre-tax earnings of $93.1 million, $100.2 million, and $117.2 million in 2022, 2021, and 2020, respectively. The Company’s consolidated financial statements provide for any related tax liability on undistributed earnings that we intend to repatriate in the foreseeable future. At December 31, 2022, income taxes have not been provided on a cumulative total of $744.0 million as we do not foresee repatriating these foreign earnings. The amount of unrecognized deferred tax liability related to these foreign earnings is estimated to be approximately $17.7 million. Earnings retained by subsidiaries and equity-accounted investments amount to approximately $767.0 million (2021: $702.7 million; 2020: $645.8 million). The Company accrues withholding and other taxes that would become payable on the distribution of earnings only to the extent that either the Company does not control the relevant entity or it is expected that these earnings will be remitted in the foreseeable future.

9.     Income Taxes (continued)

The tax effects of temporary differences that give rise to significant deferred tax assets and deferred tax liabilities were as follows:

At December 31,	2022		2021
Deferred tax assets:
Working capital	$	15,357	$	16,622
Property, plant and equipment		5,049		6,098
Share-based compensation		10,580		5,661
Tax losses and tax credit carryforwards		22,131		31,001
Lease liabilities		29,553		28,769
Notes receivable/payable		4,276		760
Other		7,429		6,576
		94,375		95,487
Deferred tax liabilities:
Property, plant and equipment	$	(18,204)	$	(18,305)
Goodwill		(10,564)		(7,382)
Intangible assets		(59,909)		(66,320)
Right-of-use assets		(26,016)		(25,606)
Long-term debt		(131)		(3,605)
Notes receivable/payable		(9,893)		(879)
Other		(7,681)		(5,053)
		(132,398)		(127,150)
Net deferred tax liabilities	$	(38,023)	$	(31,663)
Valuation allowance		(9,308)		(13,162)
	$	(47,331)	$	(44,825)

At December 31, 2022, the Company had non-capital loss carryforwards that are available to reduce taxable income in the future years. These non-capital loss carryforwards expire as follows:

2023	$	1,278
2024		194
2025		115
2026		31
2027 and thereafter		39,955
	$	41,573

The Company has capital loss carryforwards of approximately $82.5 million (2021: $82.2 million) available to reduce future capital gains and interest deduction carryforwards of $1.8 million (2021: $2.5 million), both of which carryforward indefinitely.

Tax losses are denominated in the currency of the countries in which the respective subsidiaries are located and operate. Fluctuations in currency exchange rates could reduce the U.S. dollar equivalent value of these tax loss and tax credit carry forwards in future years.

At December 31, 2022, the Company had gross unrecognized tax benefits of $16.0 million (2021: $18.9 million). Of this total, $6.9 million (2021: $8.6 million) represents the net amount of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate.

9.     Income Taxes (continued)

Reconciliation of gross unrecognized tax benefits:

At December 31,	2022		2021
Unrecognized tax benefits, beginning of year	$	18,859	$	20,298
Increases – tax positions taken in prior period		591		452
Increases – tax positions taken in current period		590		1,077
Settlement and lapse of statute of limitations		(3,570)		(3,303)
Currency translation adjustment		(479)		335
Unrecognized tax benefits, end of year	$	15,991	$	18,859

Interest expense and penalties related to unrecognized tax benefits are recorded within the provision for income tax expense on the consolidated income statement. At December 31, 2022, the Company had accrued $3.5 million (2021: $3.9 million) for interest and penalties.

In the normal course of business, the Company is subject to audit by the Canadian federal and provincial taxing authorities, by the U.S. federal and various state taxing authorities and by the taxing authorities in various foreign jurisdictions. Tax years ranging from 2014 to 2021 remain subject to examination in Canada, the United States, Luxembourg, and the Netherlands.

The Canada Revenue Agency (“CRA”) has been conducting audits of the Company’s 2014, 2015, 2017, 2018 and 2019 taxation years. If the CRA challenges the manner in which the Company has filed its tax returns and reported its income with respect to any of the audits, the Company will have the option to appeal any such decision. While the Company believes it is, and has been, in full compliance with Canadian tax laws and expects to vigorously contest any proposed assessments or any notice of assessments or reassessments received from the CRA, the Company is unable to predict the ultimate outcome of these audits and the final disposition of any appeals pertaining to such audits. If the CRA makes an adverse determination and the Company is unsuccessful in appealing such determination reflected in any assessment or reassessment, then the Company could incur additional income taxes, penalties, and interest, which could have a material negative effect on its operations. 

On February 13, 2023, the CRA issued a proposal letter to Ritchie Bros. Auctioneers (International) Ltd. asserting that one of its Luxembourg subsidiaries was resident in Canada from 2010 through 2015 and that its worldwide income should be subject to Canadian income taxation. The Luxembourg subsidiary was in operation from 2010 until 2020. In the event that the CRA issues a notice of assessment or reassessment, the Company expects to vigorously contest such notice as the Company disagrees with the assertion regarding Canadian residency. In the event that a court of competent jurisdiction makes a final determination that the income of the Luxembourg subsidiary for 2010 through 2015 was subject to Canadian income tax laws, the Company may ultimately be liable for additional total Canadian federal and provincial income tax of approximately $26.0 million - $30.0 million, exclusive of interest and penalties, for the period specified in the proposal letter. The CRA may also challenge the manner in which the Company has filed its tax returns and reported its income with respect to 2016 to 2020 taxation years and may assert that the income of the Luxembourg subsidiary was subject to Canadian income tax because the Luxembourg subsidiary was also resident in Canada during these years. The Company could then incur additional income taxes, penalties and interest which could have a material negative effect on its operations.