Note 6—Income Taxes

(Benefit) Provision for Income Taxes

(Loss) income from continuing operations, before income taxes consisted of the following:


	For the Year Ended
(in millions of U.S. dollars)	December 30, 2017			December 31, 2016			January 2, 2016
Canada	$	(29.1	)	$	(25.4	)	$	17.3
Outside Canada		(4.5	)		(13.7	)		(16.7	)

(Loss) income from continuing operations, before income taxes	$	(33.6	)	$	(39.1	)	$	0.6

Income tax (benefit) expense consisted of the following:


	For the Year Ended
(in millions of U.S. dollars)	December 30, 2017			December 31, 2016			January 2, 2016
Current
Canada	$	—		$		—	$	4.0
Outside Canada		3.9				1.3		2.9

	$	3.9			$	1.3	$	6.9

Deferred
Canada	$	—			$	8.7	$	(1.2	)
Outside Canada		(33.9	)			11.2		(20.8	)

	$	(33.9	)		$	19.9	$	(22.0	)

Income tax (benefit) expense	$	(30.0	)		$	21.2	$	(15.1	)

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


	For the Year Ended
(in millions of U.S. dollars)	December 30, 2017			December 31, 2016			January 2, 2016
Income tax (benefit) expense based on Canadian statutory rates	$	(8.7	)	$	(10.1	)	$	0.1
Foreign tax rate differential		(1.3	)		(1.3	)		(0.5	)
Local taxes		(0.2	)		(1.1	)		(1.5	)
Nontaxable interest income		(11.3	)		(7.9	)		(5.5	)
Impact of intercompany transactions and dividends		(9.2	)		(10.6	)		(13.8	)
Nontaxable capital gains		(3.7	)		—			(1.4	)
Dividend income		—			1.1			0.9
Change in enacted tax rates		(32.7	)		(0.6	)		1.3
Change in valuation allowance		45.8			48.6			(0.8	)
Change in uncertain tax positions		(2.4	)		(0.2	)		(0.7	)
Equity compensation		1.1			0.6			0.9
Permanent differences		(0.6	)		1.8			0.7
Outside basis differences on discontinued operations		(3.8	)		—			—
Adjustments to deferred taxes		(3.4	)		—			5.5
Other items		0.4			0.9			(0.3	)

Income tax (benefit) expense	$	(30.0	)	$	21.2		$	(15.1	)

Deferred Tax Assets and Liabilities

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 30, 2017			December 31, 2016
Deferred tax assets
Net operating loss carryforwards	$	181.6		$	204.1
Capital loss carryforwards		4.5			1.1
Liabilities and reserves		35.7			42.5
Stock options		7.0			5.5
Inventories		4.5			5.2
Interest expense		25.4			31.1
Outside basis differences on discontinued operations		3.8			—
Other		4.9			9.4

		267.4			298.9

Deferred tax liabilities
Property, plant & equipment		(69.2	)		(104.5	)
Intangible assets		(165.2	)		(231.7	)

		(234.4	)		(336.2	)

Valuation allowance		(129.1	)		(117.7	)

Net deferred tax liability	$	(96.1	)	$	(155.0	)

The following changes were made to the December 31, 2016 presentation of the temporary differences to conform with the current period presentation: Deferred tax assets associated with disallowed interest deductions were reclassed from net operating loss carryforwards to interest expense and the deferred tax asset associated with the unamortized premium on the DSS Notes was reclassed from intangible assets to interest expense.

On December 22, 2017, the U.S. government enacted the Tax Act, which significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21%, limiting various business deductions and repealing the corporate alternative minimum tax. Many provisions in the Tax Act are generally effective in tax years beginning after December 31, 2017. U.S. GAAP requires the impact of tax legislation to be recognized in the period in which the law was enacted. As a result of the Tax Act, we recorded tax benefits in the fourth quarter of 2017 of $32.2 million due to a re-measurement of the U.S deferred tax assets and liabilities and $1.3 million due to the repeal of the corporate alternative minimum tax. The tax benefits represent provisional amounts and our current best estimates. The provisional amounts incorporate assumptions made based upon our current interpretation of the Tax Act and may be refined through the fourth quarter of 2018 as we receive additional clarification and implementation guidance.

As a result of adopting ASU 2016-09 in 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 30, 2017, we have outside tax basis differences, including undistributed earnings, in our foreign subsidiaries. For 2017, we recorded a deferred tax asset of $3.8 million with a corresponding valuation allowance for the reversal of certain outside basis differences related to the divestiture of the Traditional Business. Deferred taxes have not been recorded on the remaining undistributed earnings because the foreign subsidiary has the ability to repatriate funds to its parent company tax-efficiently or the 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 $27.5 million, nil, and $17.3 million, to Canada in 2017, 2016 and 2015, respectively, incurring no tax expense.

As of December 30, 2017, we have operating loss carryforwards totaling $785.0 million, capital loss carryforwards totaling $17.8 million, and credit carryforwards totaling $4.1 million. The operating loss carryforward amount was attributable to Canadian operating loss carryforwards of $129.6 million that will expire from 2027 to 2038; U.S. federal and state operating loss carryforwards of $459.2 million and $19.6 million, respectively, that will expire from 2018 to 2038; Dutch operating loss carryfowards of $102.1 million that will expire from 2018 to 2024; and various other operating loss carryforwards of $74.5 million that will expire from 2018 to 2038.

The capital loss carryforward is attributable to Canadian capital losses of $12.9 million and Israeli capital losses of $4.9 million, all with indefinite lives. The credit carryforward is attributable to a refundable U.S. federal alternative minimum tax credit carryforward of $1.3 million, other U.S. federal credit carryforwards with a limited carryforward life of $0.9 million, and U.S. state credit carryforwards of $1.9 million that will expire from 2018 to 2022.

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 of control limitation as of December 30, 2017.

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, it was determined in 2016 that 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., Canada, and certain jurisdictions within the Eden business. The balance of the valuation allowance was $129.1 million and $117.7 million for the years ended December 30, 2017 and December 31, 2016, respectively. The valuation allowance increase in 2017 was primarily related to losses in tax jurisdictions with existing valuation allowances, but this increase was largely offset with valuation allowance reductions related to U.S. tax reform and recent acquisitions.

Additionally, we have determined that it is more likely than not that the benefit from our capital losses in Canada and Israel 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 $4.5 million on our capital losses.

The Transaction is anticipated to generate a taxable gain on sale in the U.S. which could result in a U.S. valuation allowance release and recognition of a material income tax benefit within the next twelve months.

Unrecognized Tax Benefits

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


	For the Year Ended
(in millions of U.S. dollars)	December 30, 2017			December 31, 2016			January 2, 2016
Unrecognized tax benefits at beginning of year	$	28.6		$	9.9		$	12.3
Additions based on tax positions taken during a prior period		0.2			0.2			0.2
Reductions based on tax positions taken during a prior period		(6.3	)		—			(1.6	)
Settlement on tax positions taken during a prior period		(1.0	)		(4.5	)		(0.6	)
Tax rate change		(4.5	)		—			—
Lapse in statute of limitations		(3.2	)		(0.1	)		(1.8	)
Additions based on tax positions taken during the current period		1.7			24.0			1.9
Foreign exchange		0.7			(0.9	)		(0.5	)

Unrecognized tax benefits at end of year	$	16.2		$	28.6		$	9.9

As of December 30, 2017, we had $16.2 million of unrecognized tax benefits, a net decrease of $12.4 million from $28.6 million as of December 31, 2016. If we recognized our tax positions, approximately $6.2 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 $3.6 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 30, 2017, December 31, 2016 and January 2, 2016. The amount of interest and penalties recognized in the Consolidated Balance Sheets for 2017 and 2016 were a liability of $0.7 million and $1.8 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 2012 are closed to audit by U.S. state jurisdictions. We are currently under audit in Canada by the Canada Revenue Agency (“CRA”) for tax years 2013 to 2015. Years prior to 2012 are closed to audit by the CRA. We are currently under audit in Israel for the 2013 to 2015 tax years and in Poland for the 2014 and 2016 tax years.