Note 6—Income Tax Expense (Benefit)

Loss before income taxes consisted of the following:


	For the Year Ended
	December 31,			January 2,			January 3,
(in millions of U.S. dollars)	2016			2016			2015
Canada	$	(22.1	)	$	24.2		$	17.2
Outside Canada		(23.8	)		(26.3	)		(62.2	)

Loss before income taxes	$	(45.9	)	$	(2.1	)	$	(45.0	)

Income tax expense (benefit) consisted of the following:


	For the Year Ended
	December 31,			January 2,			January 3,
(in millions of U.S. dollars)	2016			2016			2015
Current
Canada	$	(0.3	)	$	4.0		$	—
Outside Canada		2.7			3.7			2.5

	$	2.4		$	7.7		$	2.5

Deferred
Canada	$	8.7		$	(2.5	)	$	0.3
Outside Canada		14.5			(27.9	)		(64.2	)

	$	23.2		$	(30.4	)	$	(63.9	)

Income tax expense (benefit)	$	25.6		$	(22.7	)	$	(61.4	)

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


	For the Year Ended
	December 31,			January 2,			January 3,
(in millions of U.S. dollars)	2016			2016			2015
Income tax (benefit) expense based on Canadian statutory rates	$	(11.8	)	$	(0.5	)	$	(11.5	)
Foreign tax rate differential		(3.5	)		(3.7	)		(9.3	)
Nontaxable interest income		(10.0	)		(5.5	)		(9.3	)
Nontaxable dividend income		(10.6	)		(13.8	)		(11.2	)
Nontaxable capital (gain) loss		—			(1.4	)		1.5
Dividend income		1.1			0.9			—
Changes in enacted tax rates		(0.6	)		1.3			(1.4	)
Change in valuation allowance		61.2			(0.4	)		(29.4	)
Increase (decrease) to uncertain tax positions		0.6			(0.6	)		1.9
Non-controlling interests		(2.2	)		(2.1	)		(1.9	)
Equity compensation adjustment to net operating loss		—			—			2.7
Permanent differences		1.9			1.3			1.7
Contingent consideration goodwill basis adjustments		—			—			1.0
Equity compensation permanent adjustment		0.6			0.9			0.6
Mexico deferred adjustment		—			—			2.5
Preferred share costs		—			0.4			—
Other items		(1.1	)		0.5			0.7

Income tax expense (benefit)	$	25.6		$	(22.7	)	$	(61.4	)

The income tax expense differs from the statutory expense due primarily to non-taxable interest income, non-taxable dividend income, differences in foreign tax rates, and the recording of a valuation allowance in the U.S. and Canada during 2016.

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


	December 31,			January 2,
(in millions of U.S. dollars)	2016			2016
Deferred tax assets
Net operating loss carryforwards	$	227.8		$	132.8
Capital loss carryforwards		1.6			0.6
Liabilities and reserves		44.8			39.4
Stock options		5.8			5.9
Inventories		5.2			4.9
Other		8.8			9.1

		294.0			192.7

Deferred tax liabilities
Property, plant & equipment		(106.2	)		(99.8	)
Intangible assets		(215.5	)		(146.4	)

		(321.7	)		(246.2	)

Valuation allowance		(129.9	)		(15.4	)

Net deferred tax liability	$	(157.6	)	$	(68.9	)

The increase in the valuation allowance from January 2, 2016 to December 31, 2016 was primarily the result of recording U.S. and Canadian valuation allowances. The following changes were made to the presentation of the temporary differences to conform with current period presentation: capital losses and credit carryforwards were broken out from loss carryforwards; leases and property, plant & equipment deferred tax assets were combined with the property, plant & equipment deferred tax liabilities; and certain inventory reserves were reclassified out of liability and reserves to inventories.

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


	December 31,			January 2,
(in millions of U.S. dollars)	2016			2016
Deferred tax assets:
Long-term	$	0.2		$	7.6
Deferred tax liabilities:
Long-term		(157.8	)		(76.5	)

Net deferred tax liability	$	(157.6	)	$	(68.9	)

As a result of adopting ASU 2016-09 during 2016 on a modified retrospective basis, with a cumulative effect adjustment to opening retained earnings, the table of deferred tax assets and liabilities shown above includes deferred tax assets at December 31, 2016 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting.

As of December 31, 2016, we have outside tax basis differences, including undistributed earnings, in our foreign subsidiaries. No deferred taxes have been recorded on the undistributed earnings for any of the foreign subsidiaries primarily due to the subsidiaries ability to repatriate funds to its parent company tax-efficiently. The remaining undistributed earnings are indefinitely reinvested under the accounting guidance. In order to arrive at this conclusion, we considered factors including, but not limited to, past experience, domestic cash requirements, cash requirements to satisfy the ongoing operations, capital expenditures and other financial obligations of our subsidiaries. It is not practicable to determine the excess book basis over outside tax basis in the shares or the amount of incremental taxes that might arise if these earnings were to be remitted. The amount of tax payable could be significantly impacted by the jurisdiction in which a distribution was made, the amount of the distribution, foreign withholding taxes under applicable tax laws when distributed, relevant tax treaties and foreign tax credits. We repatriated earnings of nil, $17.3 million, and nil to Canada in 2016, 2015 and 2014, respectively, incurring no tax expense.

As of December 31, 2016, we have operating loss carryforwards totaling $726.5 million, credit carryforwards totaling $4.1 million and capital loss carryforwards totaling $7.3 million. The operating loss carryforward amount was attributable to Canadian operating loss carryforwards of $101.7 million that will expire from 2027 to 2037; U.S. federal and state operating loss carryforwards of $442.2 million and $31.2 million, respectively, that will expire from 2017 to 2037; Dutch operating loss carryfowards of $57.2 million that will expire from 2018 to 2023; and various other operating loss carryforwards of $94.2 million that will expire from 2018 to 2037.

The credit carryforward amount was attributable to a U.S. federal alternative minimum tax credit carryforward of $1.3 million with an indefinite life, other U.S. federal credit carryforwards of $0.9 million with an indefinite life, and U.S. state credit carryforwards of $1.9 million that will expire from 2017 to 2021. The capital loss carryforward is attributable to a U.K. capital loss of $2.7 million and Israeli capital losses of $4.6 million, all with an indefinite life.

In general, under Section 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), a U.S. corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses (“NOLs”) or tax credits to offset future taxable income. Therefore, current or future changes in our Canadian stock ownership, many of which are outside of our control, could result in a U.S. ownership change under Section 382 and 383 of the Code. If we undergo a U.S. ownership change, our ability to utilize U.S. federal or state NOLs or tax credits could be limited. We monitor changes in our ownership on an ongoing basis and do not believe we had a change in control as of Decembers 31, 2016.

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 recent cumulative losses, we have determined it is more likely than not we will not realize the benefit of net operating loss carryforwards and other net deferred assets in the U.S. and Canada; we recorded a valuation allowance in the U.S. and Canada of $52.5 million and $18.4 million, respectively, for the year ended December 31, 2016. We recorded $27.3 million and $23.8 million of valuation allowances through purchase accounting during 2016 related to the acquisitions of Aquaterra and Eden, respectively. Due to uncertainty resulting from the lack of sustained taxable income in recent years in 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 this jurisdiction will not be realized in the future. In recognition of this risk, we have provided a valuation allowance of $4.7 million to reduce our deferred tax assets in Mexico.

Additionally, we have determined that it is more likely than not that the benefit from our capital losses in the Canada, the U.K. and various other countries 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 $1.6 million on our capital losses.

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 Year Ended
	December 31,			January 2,			January 3,
(in millions of U.S. dollars)	2016			2016			2015
Unrecognized tax benefits at beginning of year	$	11.5		$	12.5		$	10.5
Additions based on tax positions taken during a prior period		0.2			0.2			0.5
Reductions based on tax positions taken during a prior period		—			(0.2	)		(0.9	)
Settlement on tax positions taken during a prior period		(4.5	)		(0.6	)		(0.8	)
Lapse in statute of limitations		(0.2	)		(1.8	)		—
Additions based on tax positions taken during the current period		24.8			1.9			3.9
Foreign exchange		(1.2	)		(0.5	)		(0.7	)

Unrecognized tax benefits at end of year	$	30.6		$	11.5		$	12.5

As of December 31, 2016, we had $30.6 million of unrecognized tax benefits, a net increase of $19.1 million from $11.5 million as of January 2, 2016. We recorded $22.6 million of additions through purchase accounting during 2016 related to the Eden Acquisition and S&D Acquisition. If we recognized our tax positions, approximately $18.1 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 $11.8 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 nil of interest and penalties during the years ended December 31, 2016, January 2, 2016 and January 3, 2015. The amount of interest and penalties recognized in the Consolidated Balance Sheet for 2016 and 2015 were a liability of $1.8 million and an asset of $0.1 million, respectively.

Years through 2009 have been audited by the U.S. Internal Revenue Service, though the statutes are still open back to 2008 due to certain net operating loss carryforwards. Years prior to 2011 are closed to audit by U.S. state jurisdictions. We are currently under audit in Canada by the Canada Revenue Agency (“CRA”) for tax year 2013. Years prior to 2012 are closed to audit by the CRA. We are currently under audit in Poland for the 2014 tax year and in Mexico for the 2013 tax year.