Income taxes

12 Months Ended

Jan. 02, 2016

16. Income Taxes

The provision for income taxes from continuing operations differs from the amount that would have resulted by applying the combined Canadian federal and provincial statutory income tax rate to earnings before income taxes due to the following:

			January 2, 2016	January 3, 2015	December 28, 2013
			$	$	$
Income tax provision (recovery) at combined
	statutory rate		(1,728)	8,356	(42)

Income (decrease) by the effects of:
	Foreign tax rate differential		(3,097)	3,570	2,996
	Change in unrecognized tax benefits		(855)	(335)	153
	Impact of changes in enacted tax rates		(208)	(161)	29
	Change in valuation allowance		4,015	1,082	2,990
	Impairment loss on investment		(4,029)	1,122	2,799
	Impact of non-deductible acquisition expenses		910	-	-
	Impact of other foreign non-deductible expenses		1,190	-	-
	Benefits of losses and credits not previously
		recognized	-	(621)	-
	U.S. domestic manufacturing deduction		-	(906)	-
	Benefits of intercompany financing structures		-	-	(204)
	Other		412	(64)	(298)
	Provision for income taxes		(3,390)	12,043	8,423

The components of earnings (loss) from continuing operations before income taxes are shown below:

		January 2, 2016	January 3, 2015	December 28, 2013
		$	$	$
Canada		6,038	(4,400)	(14,881)
U.S.		(20,028)	31,469	13,112
Other		7,468	4,464	1,609
		(6,522)	31,533	(160)

The components of the provision for (recovery of) income taxes are shown below:

		January 2, 2016	January 3, 2015	December 28, 2013
		$	$	$
Current income tax provision (recovery):
	Canada	-	-	400
	U.S.	(1,982)	14,626	5,175
	Other	2,300	1,064	(191)
		318	15,690	5,384

Deferred income tax provision (recovery):
	Canada	2,484	2,741	2,583
	U.S.	(5,971)	(6,397)	1,000
	Other	(221)	9	(544)
		(3,708)	(3,647)	3,039
Provision for income taxes		(3,390)	12,043	8,423

Deferred income taxes of the Company are comprised of the following:

		January 2, 2016	January 3, 2015
		$	$
Differences in property, plant and equipment
	and intangible assets	(91,368)	(13,861)
Capital and non-capital losses		22,077	6,257
Tax benefit of scientific research expenditures		(170)	2,283
Tax benefit of costs incurred during share issuances		1,259	-
Inventory basis differences		(1,712)	4,270
Other accrued reserves		5,895	2,544
		(64,019)	1,493
Less: valuation allowance		9,347	5,332
Net deferred income tax liability		(73,366)	(3,839)

For the year ended January 2, 2016, the increase in the net deferred income tax liability was primarily driven by the Sunrise Acquisition (see note 2).

The components of the deferred income tax asset (liability) are shown below:

	January 2, 2016	January 3, 2015
	$	$
Canada	958	1,841
U.S.	(73,244)	(4,766)
Other	(1,080)	(914)
	(73,366)	(3,839)

The components of the deferred income tax valuation allowance are as follows:

		January 2, 2016	January 3, 2015
		$	$
Balance, beginning of year		5,332	4,280
Increase in valuation allowance		4,015	1,082
Adjustments to valuation allowance as a result of
	acquisitions and foreign exchange	-	(30)
Balance, end of year		9,347	5,332

The Company has approximately $0.0 million (January 3, 2015 - $4.5 million) in Canadian scientific expenditures, which can be carried forward indefinitely to reduce future years’ taxable income. The Company also has approximately $0.1 million and $0.3 million (January 3, 2015 – $0.7 million and $0.3 million) in Canadian and U.S. scientific research investment tax credits and $0.7 million (January 3, 2015 - $0.7 million) in Massachusetts research and development tax credits, which will expire in varying amounts up to 2029.

The Company has U.S. federal non-capital loss carry-forwards of approximately $29.7 million, respectively, as at January 2, 2016 (January 3, 2015 - $1.5 million, respectively). The Company also has state loss carry-forwards of approximately $10.2 million as at January 2, 2016 (January 3, 2015 - $8.1 million). The amounts are available to reduce future federal and provincial/state income taxes. Non-capital loss carry-forwards attributable to the U.S. expire in varying amounts over the next 20 years.

The Company has Canadian capital losses of approximately $0.1 million as at January 2, 2016 (January 3, 2015 - $0.1 million) for which a full valuation allowance exists. These amounts are available to reduce future capital gains and do not expire.

The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determinations, the Company considers all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Based on this evaluation, a valuation allowance of $9.3 million (January 3, 2015 - $5.3 million) has been recorded against certain assets to reduce the net benefit recorded in the consolidated financial statements.

Undistributed earnings of the Company’s non-Canadian affiliates and associated companies are considered to be indefinitely reinvested; accordingly, no provision for deferred taxes has been provided thereon.

The Company believes it has adequately examined its tax positions taken or expected to be taken in a tax return; however, amounts asserted by taxing authorities could differ from the Company’s positions. Accordingly, additional provisions on federal, provincial, state and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved. A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is presented below.

	January 2, 2016	January 3, 2015
	$	$
Balance, beginning of year	2,575	2,910
Reductions in tax positions of prior years	(855)	(553)
Additions in tax positions related to the current year	-	218
Balance, end of year	1,720	2,575

The Company’s unrecognized tax benefits largely include a possible reduction to prior year losses for U.S. exposures relating to the deductibility of certain interest amount accrued. The Company estimates approximately $1.3 million of the above unrecognized tax benefits will be realized during the next 12 months.

Consistent with its historical financial reporting, the Company has classified interest and penalties related to income tax liabilities, when applicable, as part of interest expense in its consolidated statements of operations, and with the related liability on the consolidated balance sheets. All of the unrecognized tax benefits could impact the Company’s effective tax rate if recognized.

The number of years with open tax audits varies depending on the tax jurisdiction. The Company’s major taxing jurisdictions include Canada (including Ontario) the U.S. (including multiple states), and the Netherlands. The Company’s 2007 through 2014 tax years (and any tax year for which available non-capital loss carry-forwards were generated up to the amount of non-capital loss carry-forward) remain subject to examination by the Internal Revenue Service for U.S. federal tax purposes, and the 2007 through 2014 tax years remain subject to examination by the appropriate governmental agencies for Canadian federal tax purposes. There are other ongoing audits in various other jurisdictions that are not considered material to the Company’s consolidated financial statements.