19. INCOME TAXES

The components of income before income taxes were:


	Year ended December 31,
	2018		2017		2016
Canadian	$	(97)	$	25	$	60
Non-Canadian		(1,231)		(129)		7
(Loss) income before taxes	$	(1,328)	$	(104)	$	67

Income tax expense (benefit) is comprised of the following:


	Year ended December 31,
	2018		2017		2016
Current tax (benefit) expense:
Canadian	$	(5)	$	1	$	2
Non-Canadian		—		1		—
Total	$	(5)	$	2	$	2
Deferred tax benefit:
Canadian		(54)		(22)		(3)
Non-Canadian		(3)		(142)		—
Total		(57)		(164)		(3)
Income tax benefit	$	(62)	$	(162)	$	(1)

For the year ended December 31, 2018, the applicable statutory tax rate was the Canadian statutory income tax rate. Following the U.S. Domestication, the applicable statutory tax rate will be the U.S. federal income tax rate. A reconciliation of the Canadian statutory income tax rate to our effective income tax rate is as follows:


	Year ended December 31,
	2018			2017			2016
Statutory Federal and Provincial tax rate in Canada		27	%		26	%		26	%
Expected income tax expense (benefit) at statutory rate	$	(358)		$	(27)		$	17
Impact of Tax Cuts and Jobs Act of 2017		—			26			—
Change in statutory tax rates		23			(1)			—
Non-deductible expenses		1			10			2
Foreign exchange differences		(44)			(1)			1
Change in valuation allowance		207			(123)			13
Changes in uncertain tax positions		(20)			(14)			(4)
Foreign earnings subject to different tax rates		(27)			(13)			(10)
Research and development tax credits		(18)			(19)			(20)
Non-deductible goodwill impairment		172			—			—
Other		2			—			—
Income tax	$	(62)		$	(162)		$	(1)
Effective income tax rate		4.7	%		155.8	%		(1.5)	%

The Tax Cuts and Jobs Act ("2017 Tax Act") was enacted on December 22, 2017. The 2017 Tax Act includes a broad range of tax reform proposals affecting businesses, including a reduction in the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, a one-time mandatory deemed repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred, limitations on interest expense deductions, a new base erosion focused minimum tax applicable to certain payments to foreign related parties, and the creation of new taxes on earnings of non-U.S. subsidiaries. In the fourth quarter of 2017, the Company made a reasonable estimate of the impact of the 2017 Tax Act on the existing deferred tax balances and the one-time mandatory deemed repatriation tax. The re-measurement of the deferred tax assets and liabilities, net of valuation allowance, and the estimate of the one-time mandatory deemed repatriation tax was not material.

Significant components of deferred tax assets and liabilities are as follows:


	Year ended December 31,
	2018		2017		2016
Tax benefit of losses carried forward	$	323	$	247	$	94
Research and development tax credits		175		121		45
Construction contract assets and liabilities		79		71		3
Property and equipment		15		5		—
Goodwill and intangibles		1		—		1
Trade and other payables		39		27		22
Employee benefits		55		58		85
Unrealized foreign exchange gains and losses		39		10		12
Other		2		—		1
Sub-total		728		539		263
Less: Valuation allowance		(366)		(157)		(200)
Deferred tax assets, net of valuation allowance	$	362	$	382	$	63

Construction contract assets and liabilities		(6)		(3)		(3)
Property and equipment		(3)		(1)		(12)
Goodwill and intangibles		(253)		(303)		—
Research and development tax credits		—		—		(6)
Unrealized foreign exchange gains and losses		—		(11)		(8)
Debt issuance costs		(3)		(3)		—
Other		—		(3)		—
Total net deferred tax liabilities		(265)		(324)		(29)
Deferred tax assets, net	$	97	$	58	$	34

The deferred tax assets are reduced by a valuation allowance if, upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company relies on existing deferred tax liabilities and forecasted taxable income in each applicable taxable jurisdiction in determining whether to reduce net deferred tax assets by a valuation allowance.

The 2017 Tax Act one-time repatriation tax liability effectively taxed the undistributed earnings previously deferred from U.S. income taxes. We have not provided for foreign withholding tax on the undistributed earnings from our non-U.S. subsidiaries because such earnings are considered to be indefinitely reinvested. If such earnings were to be distributed, any foreign withholding tax would not be significant.

Net operating losses carried forward as of December 31, 2018 were $1,083 million. Of these, $191 million and $731 million relate to Canadian and foreign losses, respectively, set to expire between 2026 and 2038, $158 million relate to U.S. losses which have no expiry and are subject to an annual limitation of 80% of taxable income, and $3 million related to other foreign losses which have no future expiry. The U.S. Domestication does not impact the availability of the Canadian and foreign losses carried forward to future years.

Net capital losses carried forward as of December 31, 2018 were $106 million related to Canada. The benefit of these losses has not been recognized, as the Company is not likely to generate sufficient capital gains to utilize the losses. The net capital losses in Canada have no expiry.

The Company also has tax credits carried forward of $214 million at December 31, 2018, related to research and development expenditures. Of these tax credits, $137 million relate to Canadian operations, set to expire between 2019 and 2023, and $77 million relate to U.S. operations set to expire between 2019 and 2038.

As of December 31, 2018, 2017 and 2016, there were $94 million, $132 million on and $133 million of unrecognized tax benefits that, if recognized, would be recognized as a component of income tax expense (benefit).

The following table summarizes the changes in unrecognized tax benefits:


	Year ended December 31,
	2018		2017		2016
Balance, beginning of year	$	132	$	133	$	119
Gross increases related to prior period tax positions		9		5		7
Gross increases related to current period tax positions		13		6		10
Decrease related to resolution of audits with tax authorities		(28)		—		—
Expiration of the statute of limitations		(22)		(21)		(6)
Foreign currency translation		(10)		9		3
Balance, end of year	$	94	$	132	$	133

The Company and its subsidiaries file income tax returns in Canada, the United States, and various foreign jurisdictions. With some exceptions, the Company remains subject to income tax examination in Canada for years after 2012, and in the United States for years after 1999.

The Canada Revenue Agency (“CRA”) commenced its examination of the 2014 income tax returns in February 2017, which is anticipated to be completed by the end of 2019. The CRA is also examining research and development expenditures claimed in years from 2009 to 2016. There are no significant audits underway in any of the foreign jurisdictions. While it is difficult to predict the outcome or timing of a particular tax matter, the Company believes it has adequately provided reserves for reasonably foreseeable outcomes related to these matters.

It is reasonably possible that a reduction of up to $8 million of unrecognized tax benefit and related interest and penalties will occur within the next twelve months because of the expiration of certain statutes of limitation.

The Company records interest and penalties accrued or recovered in relation to unrecognized tax benefits in income tax expense. During the years ended December 31, 2018, 2017 and 2016, the Company recognized increases/(decreases) in interest and penalties of ($7) million, $4 million and $1 million, respectively.

The amount of interest and penalties recognized in the Consolidated Balance Sheet was $7 million, $15 million, and $11 million at December 31, 2018, 2017 and 2016, respectively.