Trilogy Metals Inc.

12	Income taxes

Income tax expense differs from the amount that would result from applying the Canadian federal and provincial income tax rates to earnings before income taxes. These differences result from the following items:

in thousands of dollars

	November 30, 2017 $			November 30, 2016 $			November 30, 2015 $
Combined federal and provincial statutory tax rate		26.00	%		26.00	%		26.00	%
Income taxes at statutory rate		(5,486)			(1,264)			(2,479)
Difference in foreign tax rates		(2,267)			(750)			(680)
Effect of foreign exchange changes		-			(339)			2,264
Non-taxable gain on the sale of Sunward Investments		-			(545)			-
Non-deductible expenditures		4,664			175			239
Return to provision adjustments		(72)			(510)			(102)
Other		(357)			(68)			-
Disposition of Sunward Investments		-			7,051			-
Valuation allowance		3,518			(3,750)			758
Income tax expense		-			-			-

Deferred income taxes arise from temporary differences in the recognition of income and expenses for financial reporting and tax purposes. The significant components of deferred income tax assets and liabilities at November 30, 2017 and 2016 are as follows:

in thousands of dollars

	November 30, 2017 $		November 30, 2016 $
Deferred income tax assets
Non-capital losses		61,400		58,204
Mineral property interest		14,625		14,491
Deferred interest		9,040		9,040
Property, plant and equipment		57		47
Share issuance costs		127		126
Capital Loss		60		-
Investments		201		-
Other deductible temporary differences		353		450
Total deferred tax assets		85,863		82,358
Valuation allowance		(85,862)		(82,344)
Net deferred income tax assets		1		14
Deferred income tax liabilities
Mineral property interest		-		-
Other taxable temporary differences		(1)		(14)
Deferred income tax liabilities		(1)		(14)
Net deferred income tax assets		-		-

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (“Act”) was passed into law. The new legislation decreases the corporate federal income tax rate from 35% to 21% effective January 1, 2018. Since the Company has a November 30 fiscal year end, the US entity will have a blended tax rate of 22.2% for the November 30, 2018 fiscal year and 21% thereafter. The impact of the rate change to the deferred tax assets and liabilities will be recognized in the November 30, 2018 fiscal year.

We estimate a reduction in our available future tax benefit of $23.5 million primarily due to the re-measurement of our net deferred tax assets and liabilities which are fully offset by a valuation allowance. This estimate is based on the Company’s initial analysis of the Act. Given the significant complexity of the Act, anticipated guidance from the Internal Revenue Service about implementing the Act, and the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to the Act, this estimate may be adjusted in future periods.

The Company has loss carry-forwards of approximately $160.9 million that may be available for tax purposes. Certain of these losses occurred prior to the incorporation of the Company and are accounted for in the financial statements as if they were incurred by the Company. Prior to the NovaGold Arrangement, the Company undertook a tax reorganization in order to preserve the future deductibility of these losses for the Company, subject to the limitations below. Deferred tax assets have been recognized to the extent of future taxable income and the future taxable amounts related to taxable temporary differences for which a deferred tax liability is recognized can be offset. A valuation allowance has been provided against deferred income tax assets where it is not more likely than not that the Company will realize those benefits.

The losses expire as follows in the following jurisdictions:

in thousands of dollars

	Non-capital losses Canada $		Operating losses United States $
2018		-		4,206
2019		-		975
2020		-		830
2021		-		1
Thereafter		33,570		121,295
		33,570		127,307

Future use of U.S. loss carry-forwards is subject to certain limitations under provisions of the Internal Revenue Code including limitations subject to Section 382, which relates to a 50% change in control over a three-year period, and are further dependent upon the Company attaining profitable operations. An ownership change under Section 382 occurred on January 22, 2009 regarding losses incurred by AGC, of which the attributes of those losses were transferred to Trilogy Metals US with the purchase of the mineral property in October 2011. Therefore, approximately $39.4 million of the U.S. losses above are subject to limitation under Section 382. Accordingly, the Company’s ability to use these losses may be limited.

An additional change in control may have occurred after November 30, 2011 which may further limit the availability of losses prior to the date of change in control.

On June 19, 2015, we completed the Sunward acquisition which resulted in an acquisition of control of Sunward Resources ULC under of the Income Tax Act in Canada. Therefore, the Company’s ability to use approximately $15.2 million of losses in Canada may be limited.