TAX REFORM AND INCOME TAXES

12 Months Ended

Jul. 31, 2018

NOTE 14:

TAX REFORM AND INCOME TAXES

The Tax Cuts and Jobs Act (the “Tax Reform”), enacted on December 22, 2017, reduces the U.S. federal corporate tax rate from 35% to 21%, which is administratively effective us on August 1, 2017, the beginning of our Fiscal 2018. The Tax Reform requires us to use a blended statutory tax rate of 26.87% for the annual period of Fiscal 2018.

We have not generated taxable income and have not recorded any current income taxes in Fiscal 2018. Consequently, the tax rate change has had no impact on our current tax expenses but has impacted the existing deferred tax liabilities and will impact future deferred tax assets to be recognized. For the three months ended January 31, 2018, we remeasured our existing deferred tax liabilities at the newly enacted tax rates and recognized a deferred tax benefit of $232,843.

The accounting for the effects of the rate changes on deferred tax balances is complete and no provisional amounts were recorded for this item.

At July 31, 2018, we had U.S. and Canadian net operating loss carry-forwards of approximately $166.5 million and $5.5 million in Canadian dollars, respectively, that may be available to reduce future years’ taxable income. These carry-forwards will begin to expire, if not utilized, commencing in 2023. In Fiscal 2018, we generated tax losses totalling $19.7 million, part of which was recognized as deferred tax assets to offset the existing deferred tax liabilities of $430,121, and the remaining $17.7 million will be carried forward indefinitely as a result of the Tax Reform. Future tax benefits which may arise as a result of these losses have not been recognized in these consolidated financial statements, as their realization has been determined not likely to occur and, accordingly, we have recorded a full valuation allowance for the deferred tax asset relating to these tax loss carry-forwards.

We review the valuation allowance requirements on an annual basis based on projected future operations. When circumstances change resulting in a change in management’s judgement about the recoverability of future tax assets, the impact of the change on the valuation allowance will generally be reflected in current income.

A reconciliation of income tax computed at the federal and state statutory tax rates including the Company’s effective tax rate is as follows:

	Year Ended July 31,
	2018			2017			2016
Federal income tax provision rate		26.87	%		35.00	%		35.00	%
State income tax provision rate, net of federal income tax effect		0.59	%		0.43	%		0.35	%
Total income tax provision rate		27.46	%		35.43	%		35.35	%

The actual income tax provisions differ from the expected amounts calculated by applying the combined federal and state corporate income tax rates to our loss before income taxes. The components of these differences are as follows:

	Year Ended July 31,
	2018			2017			2016
Loss before income taxes	$	(18,534,145	)	$	(18,005,411	)	$	(17,362,111	)
Corporate tax rate		27.46	%		35.43	%		35.35	%
Expected tax recovery		(5,089,476	)		(6,379,317	)		(6,137,506	)
Increase (decrease) resulting from
Foreign tax rate differences		167,162			185,700			230,148
Permanent differences		434,863			446,377			806,736
Prior year true-up		(141,814	)		(1,028,592	)		(753,150	)
Property acquisition		-			(491,798	)		-
Foreign exchange rate differences		(41,014	)		(3,248	)		129,015
Other		35,706			81,660			59,705
Recognition of deferred tax assets		430,121			-			-
Change in valuation allowance		4,156,768			7,149,654			5,627,606
Tax adjustment from operations		(47,684	)		(39,564	)		(37,446	)

Re-measurement of deferred tax liability at 21%		(232,843	)		-			-
Recognition of deferred tax assets to offset deferred tax liability		(430,121	)		-			-
Unrealized loss, other comprehensive loss		3,137			5,209			5,207
Deferred tax benefits	$	(707,511	)	$	(34,355	)	$	(32,239	)

We have incurred taxable losses for all years since inception and, accordingly, no provision for current income tax has been recorded for the current or any prior fiscal years. During Fiscal 2018, we recorded a deferred tax benefit of $707,511 (Fiscal 2017: $34,355; and Fiscal 2016: $32,239), of which $232,843 was resulted from the re-measurement of deferred tax liabilities to the enacted tax rate of 21% on December 21, 2017, and $430,121 was resulted from recognition of deferred tax assets relating to the taxable losses incurred in Fiscal 2018 to offset the remaining deferred tax liabilities relating to the Reno Creek Acquisition.

At December 22, 2017 and July 31, 2018, we re-evaluated the realizability of our tax loss carry-forwards and our conclusion that the realization of these tax loss carry-forwards is not likely to occur remains unchanged. As a result, we will continue to record a full valuation allowance for the deferred tax assets relating to the remaining tax loss carry-forwards.

The components of income (loss) from operations before income taxes, by tax jurisdiction, are as follows:

	Year Ended July 31,
	2018			2017			2016
United States	$	(17,709,866	)	$	(17,303,682	)	$	(16,488,447	)
Canada		145,267			45,316			54,216
Paraguay		(969,546	)		(747,045	)		(927,880	)
	$	(18,534,145	)	$	(18,005,411	)	$	(17,362,111	)

The Company’s deferred tax assets (liabilities) are as follows:

	July 31, 2018			July 31, 2017
Deferred tax assets (liabilities)
Mineral properties	$	1,587,220		$	2,533,819
Exploration costs		6,556,355			10,950,241
Stock option expense		4,266,067			7,031,732
Depreciable property		(255,544	)		(367,164	)
Inventories		(3,894,552	)		(5,471,486	)
Asset retirement obligations		(28,925	)		(130,740	)
Other		57,060			179,518
Loss carry forward		42,075,593			57,989,069
		50,363,274			72,714,989
Valuation allowance		(50,366,411	)		(72,720,198	)
Deferred tax assets		(3,137	)		(5,209	)
Deferred tax assets, other comprehensive loss		3,137			5,209

Deferred tax liabilities
Mineral properties		(564,923	)		(609,470	)
Net deferred tax liabilities	$	(564,923	)	$	(609,470	)

As the criteria for recognizing future income tax assets have not been met due to the uncertainty of realization, a valuation allowance of 100% has been recorded for the current and prior years. At July 31, 2018, the deferred tax assets that may arise from the potential utilization of net operating loss carry-forwards totaled $50.4 million, decreased by $22.4 million compared to $72.7 million at July 31, 2017, primarily due to applying 21% enacted federal tax rates at July 31, 2018 compared to 35% at July 31, 2017.

The Company’s U.S. net operating loss carry-forwards expire as follows:

July 31, 2023	$	180,892
July 31, 2024		228,757
July 31, 2025		507,833
July 31, 2026		5,895,221
July 31, 2027		3,892,722
July 31, 2028		9,913,533
July 31, 2029		8,469,032
July 31, 2030		7,853,521
July 31, 2031		14,954,064
July 31, 2032		15,547,890
July 31, 2033		16,865,884
July 31, 2034		22,139,423
July 31, 2035		19,891,560
July 31, 2036		19,024,525
July 31, 2037		20,396,629
July 31, 2038		690,637
	$	166,452,123

For U.S. federal income tax purposes, a change in ownership under IRC Section 382 has occurred as a result of the Reno Creek Acquisition on August 9, 2018 and also in prior years. When an ownership change has occurred the utilization of these losses against future income would be subject to an annual limitation, which would be equal to the value of the acquired company immediately prior to the change in ownership multiplied by the IRC Section 382 rate in effect during the month of the change.

The Company’s Canadian net operating loss carry-forwards in Canadian dollars expire as follows:

July 31, 2027	$	183,105
July 31, 2028		629,788
July 31, 2029		769,072
July 31, 2030		764,230
July 31, 2031		2,205,364
July 31, 2032		761,843
July 31, 2033		69,854
July 31, 2034		61,769
July 31, 2035		41,173
July 31, 2036		9,917
	$	5,496,115