Note 6—Income Tax (Benefit) Expense

(Loss) income before income taxes consisted of the following:


	For the Year Ended
(in millions of U.S. dollars)	January 2, 2016			January 3, 2015			December 28, 2013
Canada	$	24.2		$	17.2		$	30.7
Outside Canada		(26.3	)		(62.2	)		(6.9	)

(Loss) income before income taxes	$	(2.1	)	$	(45.0	)	$	23.8

Income tax (benefit) expense consisted of the following:


	For the Year Ended
(in millions of U.S. dollars)	January 2, 2016			January 3, 2015			December 28, 2013
Current
Canada	$	4.0		$	—		$	(0.3	)
Outside Canada		3.7			2.5			(0.4	)

	$	7.7		$	2.5		$	(0.7	)

Deferred
Canada	$	(2.5	)	$	0.3		$	(0.6	)
Outside Canada		(27.9	)		(64.2	)		3.1

	$	(30.4	)	$	(63.9	)	$	2.5

Income tax (benefit) expense	$	(22.7	)	$	(61.4	)	$	1.8

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


	For the Year Ended
	January 2,			January 3,			December 28,
(in millions of U.S. dollars)	2016			2015			2013
Income tax (benefit) expense based on Canadian statutory rates	$	(0.5	)	$	(11.5	)	$	5.7
Foreign tax rate differential		(3.7	)		(9.3	)		(0.6	)
Nontaxable interest income		(5.5	)		(9.3	)		(9.7	)
Nontaxable dividend income		(13.8	)		(11.2	)		(5.4	)
Nontaxable capital (gain) loss		(1.4	)		1.5			—
Dividend income		0.9			—			—
Changes in enacted tax rates		1.3			(1.4	)		(1.5	)
Change in valuation allowance		(0.4	)		(29.4	)		12.5
(Decrease) increase to uncertain tax positions		(0.6	)		1.9			0.8
Non-controlling interests		(2.1	)		(1.9	)		(1.8	)
Equity compensation adjustment to net operating loss		—			2.7			—
Permanent differences		1.3			1.7			0.4
Contingent consideration goodwill basis adjustments		—			1.0			(0.1	)
Equity compensation permanent adjustment		0.9			0.6			0.6
Mexico deferred adjustment		—			2.5			—
Preferred share costs		0.4			—			—
Other items		0.5			0.7			0.9

Income tax (benefit) expense	$	(22.7	)	$	(61.4	)	$	1.8

The income tax benefit differs from the statutory benefit due primarily to non-taxable interest income, non-taxable dividend income, and differences in foreign tax rates. In connection with the DSS Acquisition in 2014, it was determined that the valuation allowance should be released for all U.S. federal valuation allowances.

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


	January 2,			January 3,
(in millions of U.S. dollars)	2016			2015
Deferred tax assets
Loss carryforwards	$	136.9		$	148.9
Leases		0.3			0.1
Property, plant & equipment		5.5			3.3
Liabilities and reserves		42.1			22.3
Stock options		5.9			3.0
Inventories		2.2			2.6
Other		5.6			4.4

		198.5			184.6

Deferred tax liabilities
Property, plant & equipment		(105.6	)		(127.9	)
Intangible assets		(146.4	)		(146.4	)
Other		—			(0.5	)

		(252.0	)		(274.8	)

Valuation allowance		(15.4	)		(15.8	)

Net deferred tax liability	$	(68.9	)	$	(106.0	)

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


	January 2,			January 3,
(in millions of U.S. dollars)	2016			2015
Deferred tax assets:
Current	$	—		$	—
Long-term		7.6			3.4
Deferred tax liabilities:
Current	$	—		$	—
Long-term		(76.5	)		(109.4	)

Net deferred tax liability	$	(68.9	)	$	(106.0	)

As a result of certain realization requirements of ASC Topic 718, “Compensation—Stock Compensation” (“ASC 718”), the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets at January 2, 2016 and January 3, 2015 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. As of January 2, 2016, equity will be increased by $2.8 million if and when such deferred tax assets are ultimately realized.

We treat our portion of all accumulated foreign subsidiary earnings through January 2, 2016, as indefinitely reinvested under the accounting guidance and accordingly, have not provided for any tax thereon. 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. As of January 2, 2016, approximately $17.9 million of retained earnings attributable to foreign subsidiaries was considered to be indefinitely invested. Our intention is to permanently reinvest the earnings outside of Canada. It is not practicable to determine 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. While it is not practical to determine the amount of tax, we believe that tax planning strategies would allow us to make remittances in a tax efficient manner.

As of January 2, 2016, undistributed earnings of foreign operations were considered to be permanently reinvested. Deferred taxes have not been recorded on the excess book basis in the shares of certain foreign subsidiaries as these basis differences are not expected to reverse in the foreseeable future and are expected to be permanent in duration. The basis differences arose primarily from undistributed book earnings, which we intend to reinvest indefinitely, except in certain instances where repatriation attributable to current earnings results in minimal or no taxes. We repatriated earnings of $17.3 million, nil and nil in 2015, 2014 and 2013, respectively, incurring no tax expense. The basis differences could reverse through a sale of the subsidiaries or the receipt of dividends from the subsidiaries, as well as various other events. These earnings will be permanently reinvested by such subsidiaries except in certain instances where repatriation attributable to current earnings results in minimal or no tax consequences.

As of January 2, 2016, we have operating loss carryforwards totaling $741.6 million, credit carryforwards totaling $3.7 million and capital loss carryforwards totaling $3.3 million. The operating loss carryforward amount was attributable to Mexico operating loss carryforwards of $20.1 million that will expire from 2018 to 2025 and U.S. federal and state operating loss carryforwards of $328.0 million and $333.9 million, respectively. The U.S. federal operating loss carryforwards will expire from 2028 to 2034 and the state operating loss carryforwards will expire from 2016 to 2035.

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 $1.5 million that will expire from 2015 to 2021. The capital loss carryforward is attributable to a U.K. capital loss of $3.3 million with an indefinite life.

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 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 $6.6 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 U.K. 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 $0.6 million on our U.K. capital losses.

In connection with the DSS Acquisition in 2014, it was determined that the valuation allowance should be released for all U.S. federal valuation allowances, due to the anticipated timing of deferred tax asset and liability reversal in future periods as well as projections of future taxable income in the U.S. An analysis of various U.S. state attributes indicated a need to continue providing a valuation allowance on certain filings in the amount of $8.2 million.

If our assumptions change and we determine we will be able to realize these deferred tax assets, an income tax benefit of $15.4 million will be realized as a result of the reversal of the valuation allowance at January 2, 2016.

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
	January 2,			January 3,			December 28,
(in millions of U.S. dollars)	2016			2015			2013
Unrecognized tax benefits at beginning of year	$	12.5		$	10.5		$	9.2
Additions based on tax positions taken during a prior period		0.2			0.5			0.2
Reductions based on tax positions taken during a prior period		(0.2	)		(0.9	)		—
Settlement on tax positions taken during a prior period		(0.6	)		(0.8	)		(1.2	)
Lapse in statute of limitations		(1.8	)		—			—
Additions based on tax positions taken during the current period		1.9			3.9			2.4
Foreign exchange		(0.5	)		(0.7	)		(0.1	)

Unrecognized tax benefits at end of year	$	11.5		$	12.5		$	10.5

As of January 2, 2016, we had $11.5 million of unrecognized tax benefits, a net decrease of $1.0 million from $12.5 million as of January 3, 2015. If we recognized our tax positions, approximately $9.8 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 $0.2 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 January 2, 2016, January 3, 2015 and December 28, 2013. The amount of interest and penalties recognized as an asset in the Consolidated Balance Sheets for 2015 and 2014 was $0.1 million and $0.1 million, respectively.

Years through 2008 have been audited by the Internal Revenue Service, though the statutes are still open for the 2007 and later years due to certain net operating loss carryforwards. Years prior to 2010 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 2011 through 2012. Years prior to 2010 are closed to audit by the CRA. Years prior to 2014 are closed to audit by the U.K. tax authorities, while years prior to 2012 are closed to audit by the Mexico tax authorities.