Entity information:
Income Taxes
For financial reporting purposes, income before income taxes includes the following components:
 
Year Ended
(In thousands)
December 31, 2017
 
January 1, 2017
 
January 3, 2016
Income (loss) from continuing operations before income tax expense (benefit):
 
 
 
 
 
Canada
$
25,617

 
$
25,982

 
$
(97,626
)
Foreign
104,387

 
100,699

 
70,057

Total income (loss) from continuing operations before income tax expense (benefit):
$
130,004

 
$
126,681

 
$
(27,569
)

Income tax expense (benefit) for income taxes consists of the following:
 
Year Ended
(In thousands)
December 31, 2017
 
January 1, 2017
 
January 3, 2016
Current income tax expense (benefit):
 
 
 
 
 
Canada
$
7,293

 
$
6,740

 
$
5,541

Foreign
(623
)
 
2,129

 
(466
)
Total current income tax expense (benefit):
6,670

 
8,869

 
5,075

 
 
 
 
 
 
Deferred income tax expense (benefit):
 
 
 
 
 
Canada
(22,287
)
 
3,045

 
2,063

Foreign
(11,943
)
 
9,873

 
7,034

Total deferred income tax expense (benefit):
(34,230
)
 
12,918

 
9,097

Income tax expense (benefit)
$
(27,560
)
 
$
21,787

 
$
14,172


On December 22, 2017, Congress passed the Tax Cuts and Jobs Act ("Tax Reform"). Among other items, Tax Reform reduces the federal corporate tax rate to 21% effective January 1, 2018. As a result, this has caused our net deferred tax liabilities in the U.S. to be revalued. We performed an analysis to determine the impact of the revaluation of the deferred tax assets and liabilities and have recorded a net income tax benefit of $27.2 million primarily associated with the revaluation of these deferred tax items.
In accordance with SAB 118, we have reflected the income tax effects of the aspects of Tax Reform for which the accounting under ASC 740 is complete. Our provision for income taxes does include estimates around the timing of certain deductions. To the extent those estimates change, there could be effects to income tax expense due to the change in the tax rate. We would expect to be complete with this analysis upon filing of our tax return in 2018.
The Canadian statutory rate is 26.5%, 26.6% and 26.6% for the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively. A summary of the differences between expected income tax expense (benefit) calculated at the Canadian statutory rate and the reported consolidated income tax expense (benefit) follows:
 
Year Ended
(In thousands)
December 31, 2017
 
January 1, 2017
 
January 3, 2016
Income tax expense (benefit) computed at statutory income tax rate
$
34,477

 
$
33,710

 
$
(7,325
)
Foreign rate differential
2,772

 
6,125

 
(637
)
Permanent differences
1,527

 
1,159

 
1,166

Deconsolidation and disposition
(160
)
 
(2,027
)
 
15,354

Income attributable to a permanent establishment
347

 
637

 
1,436

Change in valuation allowance
(27,603
)
 
(586
)
 
18,906

Tax exempt income
(6,469
)
 
(9,411
)
 
(9,855
)
Share based compensation
(7,583
)
 
(6,080
)
 
(1,542
)
Income tax credits
(1,833
)
 
(2,389
)
 
(2,026
)
Foreign exchange gains (losses)
770

 
(277
)
 
(2,020
)
Unrecognized tax benefits
(116
)
 
2,232

 
(142
)
Functional currency adjustments
(283
)
 
(157
)
 
1,240

Change in tax rate
1,209

 
(1,130
)
 
16

Change in tax rate due to U.S. reform
(27,138
)
 
—

 
—

Impact of Canadian tax legislation
—

 
—

 
(293
)
Withholding taxes
1,943

 
—

 
—

Other
580

 
(19
)
 
(106
)
Income tax expense (benefit)
$
(27,560
)
 
$
21,787

 
$
14,172


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 31, 2017
 
January 1, 2017
Deferred tax assets:
 
 
 
Non-capital loss carryforwards
$
34,605

 
$
52,051

Capital loss carryforwards
13,498

 
13,748

Deferred interest expense
8,671

 
10,563

Pension and post-retirement liability
4,493

 
9,457

Accruals and reserves currently not deductible for tax purposes
14,954

 
20,909

Share based compensation
6,137

 
10,805

Other
7,588

 
7,525

Total deferred tax assets
89,946

 
125,058

Valuation allowance
(13,912
)
 
(36,800
)
Total deferred tax assets, net of valuation allowance
76,034

 
88,258

Deferred tax liabilities:
 
 
 
Plant and equipment
(60,571
)
 
(88,241
)
Intangibles
(30,578
)
 
(41,222
)
Basis difference in subsidiaries
(6,558
)
 
(8,824
)
Unrealized foreign exchange loss (gain)
(6,753
)
 
(7,944
)
Other
(2,495
)
 
(2,972
)
Total deferred tax liabilities
(106,955
)
 
(149,203
)
Net deferred tax asset (liability)
$
(30,921
)
 
$
(60,945
)

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 31, 2017, our deferred tax assets in Canada were primarily the result of non-capital losses, capital losses and tax credit carryforwards. For the year ended December 31, 2017, we recorded a net valuation allowance release of $24.1 million on the basis of management’s reassessment of the amount of our deferred tax assets that are more likely than not to be realized. A valuation allowance of $8.0 million and $30.9 million was recorded against our Canada gross deferred tax asset balance for the years ended December 31, 2017, and January 1, 2017, respectively.
As of each reporting date, management considers new evidence, both positive and negative, that could affect our view of the future realization of deferred tax assets. As of December 31, 2017, due in part to cumulative pretax income in the current year in the Canada federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude that it is more likely than not that additional deferred taxes of $24.1 million are realizable. Therefore, the valuation allowance was reduced accordingly.
As of December 31, 2017 and January 1, 2017, a valuation allowance of $13.9 million and $36.8 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 Luxembourg, Mexico and the United Kingdom. Additionally, we have established valuations 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 31, 2017
 
January 1, 2017
 
January 3, 2016
Balance at beginning of period
$
36,800

 
$
40,857

 
$
35,766

Additions charged to expense and other
5,566

 
2,433

 
27,877

Deductions
(28,454
)
 
(6,490
)
 
(22,786
)
Balance at end of period
$
13,912

 
$
36,800

 
$
40,857


The losses carried forward for tax purposes are available to reduce future income taxes by $134.2 million. We can apply these losses against future taxable income as follows:
(In thousands)
Canada
 
United States
 
Other Foreign
 
Total
2018-2025
$
—

 
$
—

 
$
4,201

 
$
4,201

2026-2045
50,441

 
32,577

 
965

 
83,983

Indefinitely
—

 
—

 
46,010

 
46,010

Total tax losses carried forward
$
50,441

 
$
32,577

 
$
51,176

 
$
134,194


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 $4.4 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 31, 2017, 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 31, 2017, and January 1, 2017, our unrecognized tax benefits were $8.6 million and $9.0 million, respectively, excluding interest and penalties. Included in the balance of unrecognized tax benefits as of December 31, 2017 and January 1, 2017, are $5.9 million and $2.7 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 31, 2017
 
January 1, 2017
 
January 3, 2016
Unrecognized tax benefit at beginning of period
$
9,004

 
$
3,382

 
$
3,693

Gross increases in tax positions in current period
1,208

 
5,950

 
—

Gross decreases in tax positions in prior period
(464
)
 
(335
)
 
(172
)
Gross increases in tax positions in prior period
1,336

 
271

 
—

Lapse of statute of limitations
(17
)
 
(264
)
 
(139
)
Decrease due to change in tax rate
(2,507
)
 
—

 
—

Unrecognized tax benefit at end of period
$
8,560

 
$
9,004

 
$
3,382


We recognize interest and penalties accrued related to unrecognized tax benefits as income tax expense. During the years ended December 31, 2017, January 1, 2017, and January 3, 2016, we recorded accrued interest of $0.4 million, $0.5 million and $0.5 million, respectively. Additionally, we have recognized a liability for penalties of $0.4 million, $0.5 million and $0.6 million, and interest of $3.2 million, $5.5 million and $5.0 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 31, 2017, our tax years for 2013 and 2012 are subject to Canadian income tax examinations. We are no longer subject to Federal tax examinations in the United States for years prior to 2014 (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 2013.