6.Income Taxes



The provision for income taxes is as follows:















During the year ended December 31, 2017, the current tax recovery was primarily due to the successful resolution of certain tax items previously assessed by the taxing authorities relating to prior taxation years. During the years ended December 31, 2016 and December 31, 2015, the current tax recoveries were primarily due to amounts recorded in respect of prior periods.



On December 22, 2017, the Tax Cuts and Jobs Act (“U.S. Tax Reform”) was signed into law making significant changes to the U.S. tax code, including a reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent. During the year ended December 31, 2017, the deferred tax expense of $666 million includes a provisional adjustment of $327 million resulting from the re-measurement of the Company’s tax position due to U.S. Tax Reform. The adjustment of $327 million includes a $26 million valuation allowance re-measurement with respect to U.S. foreign tax credits and U.S. charitable donations.



The SEC Staff Accounting Bulletin No. 118 addresses the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of U.S. Tax Reform. The ultimate impact of U.S. Tax Reform may differ from the provisional amount recognized of $327 million due to additional analysis, changes in interpretations and assumptions made by the Company, additional regulatory guidance that may be issued, and actions the Company may take as a result of U.S. Tax Reform. Any subsequent adjustments to the provisional amount will be recorded in income tax expense in the period in which the analysis is complete.



U.S. Tax Reform also included new rules to limit the deductibility for related party interest amounts. As at December 31, 2017, the Company has a carryforward balance of deferred interest deductions for which a deferred income tax asset of $28 million has been recorded. It is unclear whether the new rules would limit the realizability of this carryforward interest amount. Further clarification is required of the transition rules through potential Treasury Department regulations and guidance before a final determination can be made.



During the years ended December 31, 2016 and December 31, 2015, the deferred tax recoveries were primarily due to the ceiling test impairments recognized in the Canadian and USA Operations as disclosed in Note 8.





The following table reconciles income taxes calculated at the Canadian statutory rate with the actual income taxes:







For the year ended December 31, 2017, the effective tax rate was 42.2 percent, which is higher than the Canadian statutory tax rate of 27 percent primarily due to U.S. Tax Reform, which increased Encana’s effective tax rate by 22.9 percent. The effective tax rate for the years ended December 31, 2016 and December 31, 2015 exceeded the Canadian statutory tax rate of 27 percent and 26.4 percent, respectively, primarily due to the impact of the foreign jurisdictional tax rates relative to the Canadian statutory tax rate applied to jurisdictional earnings.



The net deferred income tax asset (liability) consists of:







As at December 31, 2017, Encana has recorded a valuation allowance against U.S. foreign tax credits and U.S. charitable donations in the amounts of $156 million (2016 - $129 million) and $3 million (2016 - $4 million), respectively, as it is more likely than not that these benefits will not be realized based on expected future taxable earnings as determined in accordance with the Company’s accounting policies. This change in the valuation allowance of $26 million arose from the re-measurement due to U.S. Tax Reform as noted above. In addition, a valuation allowance of $28 million  (2016 - nil) was taken against U.S. state losses as it is more likely than not that these benefits will not be realized based on expected future taxable state earnings.

The net deferred income tax asset (liability) for the following jurisdictions is reflected in the Consolidated Balance Sheet as follows:







Tax pools, loss carryforwards, charitable donations and tax credits available are as follows:





As at December 31, 2017, approximately $3.2 billion of Encana’s unremitted earnings from its foreign subsidiaries were considered to be permanently reinvested outside of Canada and, accordingly, Encana has not recognized a deferred income tax liability for Canadian income taxes in respect of such earnings. If such earnings were to be remitted to Canada, Encana may be subject to Canadian income taxes and foreign withholding taxes. However, determination of any potential amount of unrecognized deferred income tax liabilities is not practicable.



The following table presents changes in the balance of Encana’s unrecognized tax benefits excluding interest:









The unrecognized tax benefit is reflected in the Consolidated Balance Sheet as follows:









If recognized, all of Encana’s unrecognized tax benefits as at December 31, 2017 would affect Encana’s effective income tax rate. Encana does not anticipate that the amount of unrecognized tax benefits will significantly change during the next 12 months. 



Encana recognizes interest accrued in respect of unrecognized tax benefits in interest expense. During 2017, Encana recognized $12 million (2016 - $1 million; 2015 - $2 million) in interest expense. As at December 31, 2017, Encana had a liability of $16 million (2016 - $4 million) for interest accrued in respect of unrecognized tax benefits.



Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by the taxing authorities.





Encana and its subsidiaries file income tax returns primarily in Canada and the United States. Issues in dispute for audited years and audits for subsequent years are ongoing and in various stages of completion.