Income Taxes

The provisions for income tax expense (benefit), to the Company's wholly-owned subsidiary, MethylGene US Inc., are as follows (in thousands):



	Year ended December 31,
Current:	2013			2012
Federal	$	(23	)	$	30
State	—			9
Canada	—			—
Total current tax expense (benefit)	$	(23	)	$	39

Tax expense or benefit

The differences between the effective income tax rate and the statutory tax rates during the years ended 2013 and 2012 are as follows (in thousands):



	Year Ended December 31,
	2013			2012
Net loss before tax	$	(52,882	)	$	(20,247	)
Statutory combined US federal and state tax rate (2012 - statutory combined Canadian federal and provincial tax rate)	39.83		%	26.90		%
Statutory federal and provincial taxes	$	(21,063	)	$	(5,446	)
Increase (decrease) in taxes recoverable resulting from:
Effect of change in valuation allowance	8,537			5,145
Non-deductible stock-based compensation	1,085			539
Non-deductible warrant expenses for tax purposes	8,403			—
Tax credits not taxable in Quebec	(96		)	(70		)
Share issue costs - temporary difference	(184		)	(183		)
Share issue costs - permanent difference	206			—
Effect of foreign jurisdiction tax expense	—			39
Differential in income tax rates of foreign subsidiary	3,059			—
Other differences	30			15
Income tax expense (benefit)	$	(23	)	$	39

The combined statutory tax rate used for fiscal 2013 differs from the previous year due to the change in home jurisdiction under the consolidation process pursuant to implementation of the plan of arrangement on June 28, 2013.

Deferred tax

The following table summarizes the significant components of our deferred tax assets (in thousands):



	DECEMBER 31,
Deferred tax assets	2013			2012
Assets
Tangible and intangible depreciable assets	$	874		$	853
Manufactured drug product inventory to be used in research	1,459			757
Provisions	93			30
Financing fees	445			628
Net operating loss carry forwards	13,099			6,883
Scientific research and experimental development expenditures	5,766			4,245
Deferred tax assets	21,736			13,396
Valuation allowance	(21,736		)	(13,396		)
Net deferred tax assets	$	—		$	—

Total valuation allowance increased by $8.3 million for the year ended December 31, 2013. The Company has determined that it is more likely than not that it will not recognize the benefits of its US federal and state deferred tax assets and its Canadian federal and provincial deferred tax assets and, as a result, has established a full valuation allowance against its deferred tax assets as of December 31, 2013.

For Canadian federal income tax purposes, the Company's Canadian federal scientific research and experimental development expenditures amounted to $20.7 million and $15.2 million for the years ended December 31, 2013 and 2012, respectively and for provincial income tax purposes amounted to $22.4 million and $16.8 million for the years ended December 31, 2013 and 2012, respectively. These expenditures are available to reduce future taxable income and have an unlimited carry forward period. Scientific research and development expenditures are subject to verification by the taxation authorities, and accordingly, these amounts may vary by a material amount.

The Company also has accumulated share issue expenses that have not been deducted for income tax purposes amounting to approximately $1.7 million and $2.4 million for the years ended December 31, 2013 and 2012, respectively. The benefits of these expenses have not been recognized in the financial statements.

The Company's net operating loss carry forwards ("NOLs") for US federal and state income taxes were $2.8 million and $2.9 million, respectively, for the year ended December 31, 2013. There were no NOLs for US federal income taxes for the year ended December 31, 2012. The Company's NOLs for Canadian federal income tax purposes, were $44.1 million and $25.3 million at December 31, 2013 and 2012, respectively while the NOLs were $45.0 million and $25.6 million at December 31, 2013 and 2012, respectively, for provincial tax purposes.

The NOLs are available to offset future taxable income from US federal and state tax sources and Canadian federal and provincial tax sources and the tax benefits of which have not been recognized in the consolidated financial statements. The NOLs expire as follows (in thousands):



	US				Canada
	Federal		State		Federal		Provincial
Expires in:
2030	$	—	$	—	$	5,907	$	5,984
2031	—		—		7,059		7,066
2032	—		—		12,371		12,495
2033	2,838		2,919		18,717		19,467
	$	2,838	$	2,919	$	44,054	$	45,012

The future utilization of the US federal and state NOLs carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or may occur in the future. The Tax Reform Act of 1986 (the Act) limits a company's ability to utilize certain tax credit carryforwards and net operating loss carryforwards in the event of a cumulative change in ownerships in excess of 50% as defined in the Act. The Canadian Federal and Provincial Tax Acts maintain similar rules in the case of acquisition of control.

The Company files income tax returns in the US (federal and state) and Canada (federal and provincial). The Company’s U.S. operations have not been audited for any open taxation years. The Company has experienced losses for U.S. tax purposes and therefore, the taxation authorities may review any loss year, if and when the losses are utilized.

The Company's Canadian operations have been audited for provincial tax purposes up to and including December 31, 2009. For Canadian federal tax purposes, the Company remains subject to audit for the December 31, 2009 and subsequent taxation years. Where taxation years remain open, the Company considers it reasonably possible that issues may be raised or tax positions agreed to with the taxation authorities, which may result in increases or decreases of the balance of non-refundable ITCs and NOLs. However, an estimate of such increases and decreases cannot be currently made.

A reconciliation of the beginning and ending gross amounts of Canadian unrecognized tax positions adopted by the Company are as follows (in thousands):



	Federal					Provincial
	December 31,					December 31,
	2013			2012		2013		2012
Unrecognized tax positions, beginning of year	$	159		$	157	$	5	$	3
Gross decrease — current period tax positions	—			—		—		—
Gross increase — current period tax positions	—			2		—		2
Gross decrease — prior period tax positions	(48		)	—		—		—
Gross increase — prior period tax positions	18			—		18		—
Unrecognized tax positions, end of year	$	129		$	159	$	23	$	5

Included in the balance of unrecognized tax positions at December 31, 2013 and 2012, is $0.2 million and $0.2 million, respectively, that if recognized, would not impact the Company's income tax benefit or effective tax rate as long as the Company's deferred tax assets remain subject to a full valuation allowance. We do not expect any significant increases or decreases to the Company's unrecognized tax positions within the next 12 months.

The Company had no accrual for interest or penalties on tax matters as at December 31, 2013 and 2012 and the Company had no ongoing tax audits as of December 31, 2013.