15. Income taxes
Major components of our income tax (expense) benefit for the years ended December 31, 2017, 2016, and 2015 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Canada | | $ | — |
| | $ | — |
| | $ | — |
|
United States | | (1,407 | ) | | (3,477 | ) | | (3,167 | ) |
Total current income tax (expense) benefit | | (1,407 | ) | | (3,477 | ) | | (3,167 | ) |
Deferred: | | |
| | |
| | |
Canada | | — |
| | — |
| | — |
|
United States | | (4,189 | ) | | (247 | ) | | 14,905 |
|
Total deferred income tax (expense) | | (4,189 | ) | | (247 | ) | | 14,905 |
|
Total income tax (expense) benefit | | $ | (5,596 | ) | | $ | (3,724 | ) | | $ | 11,738 |
|
Canada and United States components of (loss) / income before income taxes for the years ended December 31, 2017, 2016, and 2015 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
Canada | | $ | (31,285 | ) | | $ | (25,139 | ) | | $ | (1,180 | ) |
United States | | 13,217 |
| | 27,163 |
| | 33,695 |
|
Total | | $ | (18,068 | ) | | $ | 2,024 |
| | $ | 32,515 |
|
The annual tax (expense) / benefit is different than the amount that would be provided by applying the statutory federal income tax rate to our pretax (loss) / income. A reconciliation of the Company's Canadian effective tax rate with the statutory tax rate for the years indicated is below (in thousands):
|
| | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | 2015 |
| | Amount | | Amount | | Amount |
Income and mining tax (expense) / benefit at statutory rate | | $ | 4,697 |
| | $ | (601 | ) | | $ | (8,454 | ) |
Effects of Canada to United States statutory rates on earnings of subsidiaries | | (984 | ) | | (2,445 | ) | | (3,033 | ) |
Effect on deferred tax balances of change in U.S. statutory rate | | (10,495 | ) | | — |
| | — |
|
State income tax expense | | (2,656 | ) | | (2,515 | ) | | (2,342 | ) |
Share-based compensation expense | | (633 | ) | | 1,395 |
| | 130 |
|
Percentage depletion | | 4,157 |
| | 5,993 |
| | 309 |
|
Foreign exchange rate gain / (loss) | | (17 | ) | | 127 |
| | (1,174 | ) |
Deferred tax asset (recognized) / not recognized | | 449 |
| | (5,627 | ) | | 26,428 |
|
Other | | (114 | ) | | (51 | ) | | (126 | ) |
Income tax (expense) / benefit | | $ | (5,596 | ) | | $ | (3,724 | ) | | $ | 11,738 |
|
At December 31, 2017 and 2016, the significant components of the Company’s deferred tax assets and liabilities are below (in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Mineral properties, plant and equipment | | $ | 37,070 |
| | $ | 41,340 |
|
Net operating losses | | 25,736 |
| | 14,341 |
|
Asset retirement obligation | | 4,963 |
| | 4,729 |
|
Inventory | | (2,114 | ) | | 1,479 |
|
Tax credits | | — |
| | 1,402 |
|
Derivatives | | 36 |
| | 971 |
|
Other | | 4,324 |
| | 6,580 |
|
Deferred tax assets | | 70,015 |
| | 70,842 |
|
Valuation allowances | | (58,686 | ) | | (62,381 | ) |
Net deferred tax assets | | 11,329 |
| | 8,461 |
|
| | | | |
Deferred tax liabilities: | | | | |
Share-based compensation | | 389 |
| | (396 | ) |
Property, plant and equipment and inventory | | (9,135 | ) | | (1,494 | ) |
Foreign exchange and other | | (1,452 | ) | | (1,251 | ) |
Deferred tax liabilities | | (10,198 | ) | | (3,141 | ) |
Net deferred tax asset | | $ | 1,131 |
| | $ | 5,320 |
|
The Company evaluated evidence available to determine the amount of valuation allowance required on its deferred tax assets. At December 31, 2017 and 2016, the balances of our valuation allowances were approximately $58.7 million and $62.4 million, respectively. These balances were primarily related to Canadian exploration and development expense pools obtained through the purchase of True North in 2016 and exploration and development costs with tax basis in excess of book. If it is determined that the Company will ultimately be more likely than not to realize all or a portion of the related benefits for which a valuation allowance has been provided, all or a portion of the related valuation allowance will be reduced.
The net change in the Company's valuation allowance for the years ended December 31, 2017, 2016, and 2015 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
Balance, beginning of year | | $ | (62,381 | ) | | $ | (20,217 | ) | | $ | (39,895 | ) |
U.S. built-in loss not recognized | | 4,419 |
| | 1,142 |
| | 1,142 |
|
AMT credits not recognized | | 1,392 |
| | (689 | ) | | (410 | ) |
Recognition of US deferred tax assets | | (959 | ) | | — |
| | 17,530 |
|
Canadian exploration and development expense pools | | 614 |
| | (36,538 | ) | | — |
|
Canadian net operating losses | | (1,771 | ) | | (6,079 | ) | | 1,416 |
|
Balance, end of year | | $ | (58,686 | ) | | $ | (62,381 | ) | | $ | (20,217 | ) |
As of December 31, 2017, the Company had Canadian net operating loss carryforwards of $72.2 million which expire between 2032 and 2037. The Company also had U.S. net operating loss carryforwards of $24.7 million which expire in 2037.
The Company files income tax returns in Canada and the U.S. The statute of limitations remains open from 2012 - 2017.
The Company classifies interest and penalties as a component of Interest income and other (expense), net in its Consolidated Statements of (Loss) Income. The amount of interest and penalties recognized in the Consolidated Statements of (Loss) Income were nil, nil, and nil for the years ended December 31, 2017, 2016, and 2015, respectively.
The US government enacted the Tax Cuts and Jobs Act of 2017 ("TCJA") on December 22, 2017. As of December 31, 2017, the Company is still evaluating the complete tax effects of the enactment of the TCJA. However, the Company has determined a reasonable estimate of the impact of the TCJA on its existing deferred tax balances. As a result of tax legislation, the federal US corporate tax rate has been substantially reduced effective January 1, 2018. In respect of its US operations, Klondex recorded its deferred tax assets and liabilities as at December 31, 2017 at the new federal rate of 21% (35% in 2017). The effect on deferred tax balances due to changes in US statutory rates was $10.5 million.
The new tax legislation also made Alternative Minimum Tax ("AMT") credits refundable. As a result, the Company recorded an income tax receivable for the balance of AMT credits of $1.6 million.
As noted above, the Company is still evaluating the complete tax effects of the enactment of the TCJA and there are a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions in the TCJA. In the absence of guidance on these matters and until the 2017 tax returns are finalized, which the Company expects to occur by October 2018, the Company expects to use what it believes are reasonable interpretations and assumptions in applying the TCJA for purposes of determining its cash tax liabilities and results of operations, which may change as it receives additional clarification and implementation guidance. Despite the fact that the Company has not yet prepared its tax returns for 2017 it does not expect to identify any overall material adverse effect on its tax liability and financial condition.