Income Taxes

12 Months Ended

Dec. 29, 2019

For financial reporting purposes, income before income taxes includes the following components:



	Year Ended
(In thousands)	December 29, 2019		December 30, 2018		December 31, 2017
Income before income tax expense (benefit):
Canada	$	21,345	$	19,552	$	25,617
Foreign	45,003		100,805		103,804
Total income before income tax expense (benefit)	$	66,348	$	120,357	$	129,421

Income tax expense (benefit) for income taxes consists of the following:



	Year Ended
(In thousands)	December 29, 2019		December 30, 2018		December 31, 2017
Current income tax expense (benefit):
Canada	$	7,600	$	7,997	$	7,293
Foreign	6,417		5,253		(623		)
Total current income tax expense:	14,017		13,250		6,670

Deferred income tax expense (benefit):
Canada	1,497		122		(22,287		)
Foreign	1,795		10,441		(11,943		)
Total deferred income tax expense (benefit):	3,292		10,563		(34,230		)
Income tax expense (benefit)	$	17,309	$	23,813	$	(27,560	)

The Canadian statutory rate is 26.7%, 26.5% and 26.5% for the years ended December 29, 2019, December 30, 2018, and December 31, 2017, respectively. A summary of the differences between expected income tax expense calculated at the Canadian statutory rate and the reported consolidated income tax expense (benefit) follows:



	Year Ended
(In thousands)	December 29, 2019			December 30, 2018			December 31, 2017
Income tax expense computed at statutory income tax rate	$	17,702		$	31,895		$	34,477
Foreign rate differential	(4,503		)	(4,926		)	2,772
Permanent differences	1,195			(1,822		)	1,527
Disposal of subsidiaries	2,751			(21		)	(160		)
Income attributable to a permanent establishment	148			1,873			347
Change in valuation allowance	(1,463		)	3,878			(27,603		)
Tax exempt income	(2,451		)	(5,673		)	(6,469		)
Share based compensation	(341		)	(737		)	(7,583		)
Income tax credits	(1,869		)	(3,252		)	(1,833		)
Foreign exchange gains (losses)	(991		)	(2,683		)	770
Unrecognized tax benefits	(848		)	646			(116		)
Change in tax rate	267			(284		)	1,209
Change in tax rate due to U.S. reform	—			—			(27,138		)
Limitation on executive compensation	773			2,038			—
Withholding and other taxes	2,006			3,631			1,943
Nondeductible interest	4,814			—			—
Other	119			(750		)	297
Income tax expense (benefit)	$	17,309		$	23,813		$	(27,560	)

Deferred tax assets arise from available net operating losses and deductions. Our ability to use those net operating losses is dependent upon our results of operations in the tax jurisdictions in which such losses or deductions arose. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:



	Year Ended
(In thousands)	December 29, 2019			December 30, 2018
Deferred tax assets:
Non-capital loss carryforwards	$	23,363		$	24,536
Capital loss carryforwards	9,740			12,674
Deferred interest expense	10,181			8,990
Pension and post-retirement liability	925			3,410
Accruals and reserves currently not deductible for tax purposes	19,222			16,683
Share based compensation	3,220			3,314
Income tax credits	6,632			5,694
Lease right-of-use assets	40,921			—
Other	2,075			2,114
Total deferred tax assets	116,279			77,415
Valuation allowance	(15,569		)	(16,373		)
Total deferred tax assets, net of valuation allowance	100,710			61,042
Deferred tax liabilities:
Plant and equipment	(77,882		)	(64,831		)
Intangibles	(32,491		)	(35,740		)
Basis difference in subsidiaries	(7,771		)	(7,070		)
Unrealized foreign exchange gain	(328		)	(5,102		)
Lease liabilities	(37,930		)	—
Other	(1,828		)	(1,912		)
Total deferred tax liabilities	(158,230		)	(114,655		)
Net deferred tax liability	$	(57,520	)	$	(53,613	)

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.

As of December 29, 2019, and December 30, 2018, a valuation allowance of $15.6 million and $16.4 million, respectively, has been established to reduce the deferred tax assets to an amount that is more likely than not to be realized. We have established valuation allowances on certain deferred tax assets resulting from net operating loss carryforwards and other assets in Costa Rica and the United Kingdom. Additionally, we have established valuation allowances on capital loss carryforwards in Canada. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.

The following is a rollforward of the valuation allowance for deferred tax assets:



	Year Ended
(In thousands)	December 29, 2019			December 30, 2018			December 31, 2017
Balance at beginning of period	$	16,373		$	13,912		$	36,800
Additions charged to expense and other	2,863			12,590			5,566
Deductions	(3,667		)	(10,129		)	(28,454		)
Balance at end of period	$	15,569		$	16,373		$	13,912

The losses carried forward for tax purposes are available to reduce future taxable income by $89.6 million. We can apply these losses against future taxable income based on the period of expiration as follows:



(In thousands)	Canada		Other Foreign		Total
2020-2027	$	—	$	5,876	$	5,876
2028-2040	60,605		—		60,605
Indefinitely	—		23,160		23,160
Total tax losses carried forward	$	60,605	$	29,036	$	89,641

We believe that it is more likely than not that the benefit from certain net operating loss carryforwards will not be realized. In recognition of this risk, we have provided valuation allowances of $1.3 million on these gross net operating loss carryforwards. If or when recognized, the tax benefit related to any reversal of the valuation allowance on deferred tax assets as of December 29, 2019, will be accounted for as a reduction of income tax expense.

We have outside basis differences, including undistributed earnings in our foreign subsidiaries. For those subsidiaries in which we are considered to be indefinitely reinvested, no provision for Canadian income or local country withholding taxes has been recorded. Upon reversal of the outside basis difference and/or repatriation of those earnings, in the form of dividends or otherwise, we may be subject to both Canadian income taxes and withholding taxes payable to the various foreign countries. For those subsidiaries where the earnings are not considered indefinitely reinvested, taxes have been provided as required. The determination of the unrecorded deferred tax liability for temporary differences related to investments in foreign subsidiaries that are considered to be indefinitely reinvested is not considered practical.

As of December 29, 2019, and December 30, 2018, our unrecognized tax benefits were $8.2 million and $9.1 million, respectively, excluding interest and penalties. Included in the balance of unrecognized tax benefits as of December 29, 2019, and December 30, 2018, are $5.8 million and $6.7 million, respectively, of tax benefits that, if recognized, would favorably impact the effective tax rate. The unrecognized tax benefits are recorded in other long-term liabilities and as a reduction to related long-term deferred income taxes in the consolidated balance sheets. The changes to our unrecognized tax benefits were as follows:



	Year Ended
(In thousands)	December 29, 2019			December 30, 2018			December 31, 2017
Unrecognized tax benefit at beginning of period	$	9,084		$	8,560		$	9,004
Gross increases in tax positions in current period	46			508			1,208
Gross decreases in tax positions in prior period	(973		)	(244		)	(464		)
Gross increases in tax positions in prior period	—			274			1,336
Lapse of statute of limitations	(1		)	(14		)	(17		)
Decrease due to change in tax rate	—			—			(2,507		)
Unrecognized tax benefit at end of period	$	8,156		$	9,084		$	8,560

We recognize interest and penalties accrued related to unrecognized tax benefits as income tax expense. During the years ended December 29, 2019, December 30, 2018, and December 31, 2017, we recorded accrued interest of 0.3 million, $0.5 million and $0.4 million, respectively. Additionally, we have recognized a liability for penalties of $0.4 million, $0.4 million and $0.4 million, and interest of $2.9 million, $3.3 million and $3.2 million, respectively.

We estimate that the amount of unrecognized tax benefits will not significantly increase or decrease within the 12 months following the reporting date.

We are subject to taxation in Canada, the United States and other foreign jurisdictions. As of December 29, 2019, the 2015 tax year is subject to Canadian income tax examination. We are no longer subject to Federal tax examinations in the United States for years prior to 2016 (except to the extent of loss carryforwards in 2012 and prior years). However, we are subject to United States state and local income tax examinations for years prior to 2014.