INCOME TAXES

INCOME TAX RATE RECONCILIATION



Year ended December 31,	2017		2016		2015
(millions of Canadian dollars)
Earnings before income taxes	569		2,451		11
Canadian federal statutory income tax rate	15	%	15	%	15	%
Expected federal taxes at statutory rate	85		368		2
Increase/(decrease) resulting from:
Provincial and state income taxes¹	133		34		(204	)
Foreign and other statutory rate differentials	(601	)	(56	)	310
Impact of United States tax reform²	(2,045	)	—		—
Effects of rate-regulated accounting	(189	)	(116	)	(52	)
Foreign allowable interest deductions	(124	)	(107	)	(84	)
Part VI.1 tax, net of federal Part I deduction	68		56		55
Goodwill write-down³	15		—		—
Intercompany sale of investment⁴	—		6		23
Non-taxable portion of gain on sale of investment to unrelated party⁵	—		(61	)	—
Valuation allowance⁶	(17	)	22		154
Intercorporate investment in EIPLP⁷	77		—		—
Noncontrolling interests	(80	)	(15	)	(28	)
Other⁸	(19	)	11		(6	)
Income tax (recovery)/expense	(2,697	)	142		170
Effective income tax rate	(474.0	)%	5.8	%	1,545.5	%


1	The change in provincial and state income taxes from 2016 to 2017 reflects the increase in earnings from the Canadian operations and the impact of the United States tax reform on state income tax expense.


2	The amount was due to the enactment of the “Tax Cuts and Jobs Act” by the United States on December 22, 2017, which included a reduction in the federal corporate income tax rate from 35% to 21% effective for taxation years beginning after December 31, 2017.


3	The amount relates to the federal component of the tax effect a goodwill write-down pursuant to ASU 2017-04.


4	In November 2016 and September 2015, certain assets were sold to entities under common control. The intercompany gains realized on these transfers were eliminated. However, because these transactions involved the sale of partnership units, tax consequences have been recognized in earnings.


5	The amount in 2016 represents the federal component of the non-taxable portion of the gain on the sale of the South Prairie Region assets to unrelated party.


6	The decrease from 2015 to 2016 is due to the federal component of the tax effect of a valuation allowance on the deferred tax assets related to an outside basis temporary difference that, in 2015, was no longer more likely than not to be realized.


7	There was a change in assertion regarding the manner of recovery of the intercorporate investment in EIPLP such that deferred tax related to outside basis temporary differences was required to be recorded.


8	2015 included $17 million recovery related to the federal component of the tax effect of adjustments related to prior periods.

COMPONENTS OF PRETAX EARNINGS AND INCOME TAXES



Year ended December 31,	2017		2016		2015
(millions of Canadian dollars)
Earnings/(loss) before income taxes
Canada	2,200		2,034		(1,365	)
United States	(2,431	)	(333	)	808
Other	800		750		568
	569		2,451		11
Current income taxes
Canada	129		74		157
United States	46		21		3
Other	5		4		3
	180		99		163
Deferred income taxes
Canada	299		188		(558	)
United States	(3,160	)	(151	)	565
Other	(16	)	6		—
	(2,877	)	43		7
Income tax (recovery)/expense	(2,697	)	142		170

COMPONENTS OF DEFERRED INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between carrying amounts of assets and liabilities and their respective tax bases. Major components of deferred income tax assets and liabilities are as follows:



December 31,	2017		2016
(millions of Canadian dollars)
Deferred income tax liabilities
Property, plant and equipment	(4,089	)	(3,867	)
Investments	(6,596	)	(2,938	)
Regulatory assets	(977	)	(439	)
Other	(50	)	(47	)
Total deferred income tax liabilities	(11,712	)	(7,291	)
Deferred income tax assets
Financial instruments	697		1,215
Pension and OPEB plans	258		219
Loss carryforwards	1,781		1,189
Other	1,057		374
Total deferred income tax assets	3,793		2,997
Less valuation allowance	(286	)	(572	)
Total deferred income tax assets, net	3,507		2,425
Net deferred income tax liabilities	(8,205	)	(4,866	)
Presented as follows:
Total deferred income tax assets	1,090		1,170
Total deferred income tax liabilities	(9,295	)	(6,036	)
Net deferred income tax liabilities	(8,205	)	(4,866	)

A valuation allowance has been established for certain loss and credit carryforwards, and outside basis temporary differences on investments that reduce deferred income tax assets to an amount that will more likely than not be realized.

As at December 31, 2017 and 2016, we recognized the benefit of unused tax loss carryforwards of $3.8 billion and $2.5 billion, respectively, in Canada which expire in 2025 and beyond.

As at December 31, 2017 and 2016, we recognized the benefit of unused tax loss carryforwards of $2.1 billion and $1.3 billion, respectively, in the United States which expire in 2021 and beyond.

As at December 31, 2017 and 2016, we recognized the benefit of unused capital loss carryforwards of $143 million and nil, respectively, in Canada which can be carried forward indefinitely.

As at December 31, 2017 and 2016, we recognized the benefit of unused capital loss carryforwards of $20 million and nil, respectively, in the United States which will expire in 2021.

We have not provided for deferred income taxes on the difference between the carrying value of substantially all of our foreign subsidiaries and their corresponding tax basis as the earnings of those subsidiaries are intended to be permanently reinvested in their operations. As such these investments are not anticipated to give rise to income taxes in the foreseeable future. The difference between the carrying values of the investments and their tax bases is largely a result of unremitted earnings and currency translation adjustments. The unremitted earnings and currency translation adjustment for which no deferred taxes have been recognized in respect of foreign subsidiaries were $2.1 billion and $4.1 billion for the period December 31, 2017 and 2016, respectively. If such earnings are remitted, in the form of dividends or otherwise, we may be subject to income taxes and foreign withholding taxes. The determination of the amount of unrecognized deferred income tax liabilities on such amounts is not practicable.

Enbridge and one or more of our subsidiaries are subject to taxation in Canada, the United States and other foreign jurisdictions. The material jurisdictions in which we are subject to potential examinations include the United States (Federal) and Canada (Federal, Alberta and Ontario). We are open to examination by Canadian tax authorities for the 2009 to 2017 tax years and by United States tax authorities for the 2014 to 2017 tax years. We are currently under examination for income tax matters in Canada for the 2013 to 2016 tax years. We are not currently under examination for income tax matters in any other material jurisdiction where we are subject to income tax.

United States Tax Reform

On December 22, 2017, the United States enacted the TCJA. The changes in the TCJA are effective for taxation years beginning after December 31, 2017. While the changes are broad and complex, the most significant change is the reduction in the corporate federal income tax rate from 35% to 21%. We are also impacted by a one-time deemed repatriation or “toll” tax on undistributed earnings and profits of United States controlled foreign affiliates, including Canadian subsidiaries.

We have made reasonable estimates for the measurement and accounting of certain effects of the TCJA in accordance with SEC Staff Accounting Bulletin No.118 (SAB 118). We recorded a provisional $34 million increase to our 2017 current income tax provision related to the toll tax, payable over eight years. We recorded a provisional $2.0 billion decrease to our 2017 deferred income tax provision related to the reduction in the corporate federal income tax rate. The accounting for these provisional items decreased our accumulated deferred income tax liability by $3.1 billion and increased our regulatory liability by $1.1 billion. We have also adjusted our valuation allowance for certain deferred tax assets existing at December 31, 2016 for the reduction in the corporate federal income tax rate by $0.2 billion. We have recognized these provisional tax impacts and included these amounts in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the TCJA. The accounting is expected to be complete when the 2017 US corporate income tax return is filed in 2018.

As provided for under SAB 118, we have not recorded the impact for certain items under the TCJA for which we have not yet been able to gather, prepare and analyze the necessary information in reasonable detail to complete the ASC 740 accounting. For these items, the current and deferred taxes were recognized and measured based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. These certain items include but are not limited to the computation of state income taxes as there is uncertainty on conformity to the federal tax system following the TCJA, global intangible low taxed income, and base erosion and anti-abuse tax. The determination of the impact of the income tax effects of these items will require additional analysis of historical records and further interpretation of the TCJA from yet to be issued United States Treasury regulations which will require more time, information and resources than currently available to us.

UNRECOGNIZED TAX BENEFITS



Year ended December 31,	2017		2016
(millions of Canadian dollars)
Unrecognized tax benefits at beginning of year	84		65
Gross increases for tax positions of current year	15		27
Gross increases for tax positions of prior year	65		—
Change in translation of foreign currency	(2	)	(2	)
Lapses of statute of limitations	(8	)	(6	)
Settlements	(4	)	—
Unrecognized tax benefits at end of year	150		84

The unrecognized tax benefits as at December 31, 2017, if recognized, would impact our effective income tax rate. We do not anticipate further adjustments to the unrecognized tax benefits during the next 12 months that would have a material impact on our consolidated financial statements.

We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income taxes. Income taxes for the years ended December 31, 2017 and 2016 included $3 million and $1 million recoveries, respectively, of interest and penalties. As at December 31, 2017 and 2016, interest and penalties of $8 million and $6 million, respectively, have been accrued.