Note 6—Income Tax (Benefit) Expense

Income before income taxes consisted of the following:


	For the Years Ended
(in millions of U.S. dollars)	December 31, 2011		January 1, 2011		January 2, 2010
Canada	$	20.1	$	16.2	$	0.8
Outside Canada		20.4		62.2		62.5

Income before income taxes	$	40.5	$	78.4	$	63.3

Income tax (benefit) expense consisted of the following:


	For the Years Ended
(in millions of U.S. dollars)	December 31, 2011			January 1, 2011		January 2, 2010
Current
Canada	$	2.2		$	0.5	$	(20.2	)
Outside Canada		0.5			1.8		(8.8	)

	$	2.7		$	2.3	$	(29.0	)

Deferred
Canada	$	0.8		$	4.0	$	3.3
Outside Canada		(4.2	)		12.3		2.9

	$	(3.4	)	$	16.3	$	6.2

Income tax (benefit) expense	$	(0.7	)	$	18.6	$	(22.8	)

The following table reconciles income taxes calculated at the basic Canadian corporate rates with the income tax provision:


	For the Years Ended
(in millions of U.S. dollars)	December 31, 2011			January 1, 2011			January 2, 2010
Income tax expense based on Canadian statutory rates	$	10.9		$	22.7		$	19.9
Foreign tax rate differential		(3.0	)		4.2			2.7
Tax exempt income		(14.2	)		(5.6	)		(2.8	)
Dividend income		1.0			—			—
Capital loss carry-over		(2.7	)		—			(0.5	)
Changes in enacted tax rates		(0.8	)		(0.5	)		0.8
Increase (decrease) in valuation allowance		10.3			1.0			(22.7	)
Decrease to ASC 740 reserve		(0.9	)		(1.7	)		(18.3	)
Non-controlling interests		(1.3	)		(1.8	)		(1.4	)
Other items		—			0.3			(0.5	)

Income tax (benefit) expense	$	(0.7	)	$	18.6		$	(22.8	)

Deferred income tax assets and liabilities were recognized on temporary differences between the financial and tax bases of existing assets and liabilities as follows:


(in millions of U.S. dollars)	December 31, 2011			January 1, 2011
Deferred tax assets
Loss carryforwards	$	43.3		$	21.5
Leases		5.1			6.8
Property, plant & equipment		3.2			4.8
Liabilities and reserves		11.7			12.2
Intangibles		—			—
Stock options		2.2			2.4
Other		7.4			4.3

		72.9			52.0

Deferred tax liabilities
Property, plant & equipment		(59.2	)		(54.8	)
Intangible assets		(10.5	)		(6.0	)
Other		(0.9	)		(1.9	)

		(70.6	)		(62.7	)

Valuation allowance		(22.2	)		(12.7	)

Net deferred tax liability	$	(19.9	)	$	(23.4	)

The increase in the valuation allowance from January 1, 2011 and December 31, 2011 was primarily the result of the reestablishment of a U.S. federal valuation allowance as the U.S. operating segment moved from a net federal deferred tax liability position to an adjusted net deferred tax asset position.

The deferred tax assets and liabilities have been classified as follows on the Consolidated Balance Sheets:


(in millions of U.S. dollars)	December 31, 2011			January 1, 2011
Deferred tax assets:
Current	$	10.6		$	18.2
Long-term		4.1			2.5
Deferred tax liabilities:
Current	$	(0.5	)	$	(0.5	)
Long-term		(34.1	)		(43.6	)

Net deferred tax liability	$	(19.9	)	$	(23.4	)

As a result of certain realization requirements of ASC Topic 718, "Compensation—Stock Compensation" ("ASC 718"), the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets at December 31, 2011 and January 1, 2011 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. As of December 31, 2011, equity will be increased by $2.0 million if and when such deferred tax assets are ultimately realized.

As of December 31, 2011, we have claimed the indefinite reversal exceptions of ASC 740.

As of December 31, 2011, we have operating loss carryforwards totaling $278.7 million, credit carryforwards totaling $1.4 million and capital loss carryforwards totaling $2.7 million. The operating loss carryforward amount was attributable to Mexico operating loss carryforwards of $17.9 million that will expire from 2018 to 2021 and U.S. federal and state operating loss carryforwards of $68.8 million and $192.0 million, respectively. The U.S. federal operating loss carryforwards will expire from 2027 to 2031, and the state operating loss carryforwards will expire from 2012 to 2031. The credit carryforward amount was attributable to a U.S. federal alternative minimum tax credit carryforward of $0.6 million with an indefinite life and U.S. state credit carryforwards of $0.8 million that will expire from 2014 to 2017. The capital loss carryforward is a Canadian capital loss with an indefinite life.

We establish a valuation allowance to reduce deferred tax assets if, based on the weight of the available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to uncertainty resulting from the lack of sustained taxable income in recent years in the U.S. and Mexico, we have determined that it is more likely than not that the benefit from net operating loss carryforwards and other net deferred tax assets in these jurisdictions will not be realized in the future. In recognition of this risk, we have provided a valuation allowance of $12.0 million and $7.5 million to reduce our deferred tax assets in the U.S. and Mexico, respectively.

Additionally, the Company has determined that it is more likely than not that the benefit from its capital losses in Canada will not be realized in the future due to the uncertainty regarding potential future capital gains in the jurisdiction. In recognition of this risk, we have provided a valuation allowance of $2.7 million on our Canadian capital losses.

If our assumptions change and we determine we will be able to realize these deferred tax assets, an income tax benefit of $22.2 million will be realized as a result of the reversal of the valuation allowance at December 31, 2011.

In 2006, the FASB issued guidance regarding provisions of uncertain tax positions in ASC 740, which provides specific guidance on the financial statement recognition, measurement, reporting and disclosure of uncertain tax positions taken or expected to be taken in a tax return. ASC 740 addresses the determination of whether tax benefits, either permanent or temporary, should be recorded in the financial statements.

A reconciliation of the beginning and ending amount of our unrecognized tax benefits is as follows:


	For the Years Ended
(in millions of U.S. dollars)	December 31, 2011			January 1, 2011			January 2, 2010
Unrecognized tax benefits at beginning of year	$	13.3		$	14.7		$	38.7
Additions based on tax positions taken during a prior period		0.2			0.4			2.2
Reductions based on tax positions taken during a prior period		—			(2.6	)		(29.9	)
Settlement on tax positions taken during a prior period		(5.8	)		(0.8	)		(0.4	)
Additions based on tax positions taken during the current period		1.7			1.1			1.7
Foreign exchange		(0.4	)		0.5			2.4

Unrecognized tax benefits at end of year	$	9.0		$	13.3		$	14.7

In 2011, the Company settled a multi-jurisdictional uncertain tax position that allowed it to treat $5.2 million of unrecognized Canadian tax benefits as settled. Also, as a result of the settlement, the Company will recover tax and interest in the amount of $8.5 million associated with offsetting jurisdictional benefits. This receivable is recorded as a current asset in the Company's financial statements.

As of December 31, 2011, we had $9.0 million of unrecognized tax benefits, a net decrease of $4.3 million from $13.3 million as of January 1, 2011. If the Company recognized its tax positions, approximately $4.0 million would favorably impact the effective tax rate. We believe it is reasonably possible that our unrecognized tax benefits will decrease or be recognized in the next twelve months by up to $1.2 million due to the settlement of certain tax positions and lapses in statutes of limitation in various tax jurisdictions.

We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes. We recovered $0.2 million, $0.2 million and $2.1 million of interest and penalties during the year ended December 31, 2011, January 1, 2011 and January 2, 2010, respectively. The amount of interest and penalties recognized as an asset in the Consolidated Balance Sheets for 2011 and 2010 was $3.1 million and $2.7 million, respectively.

Years prior to 2007 are closed to audit by the Internal Revenue Service. Years prior to 2006 are closed to audit by U.S. state jurisdictions. We are also currently under audit in Canada by the Canada Revenue Agency ("CRA") for tax years 2005 through 2008. Years prior to 1997 are closed to audit by the CRA. In the U.K., years prior to 2006 are closed to audit.