Note 9 – Income Taxes
The Company’s Canadian subsidiaries are subject to the income tax laws of the Province of Ontario and the country of Canada.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A full valuation allowance is established against all net deferred tax assets as of August 31, 2017 and 2016 based on estimates of recoverability. While the Company has optimistic plans for its business strategy, it determined that such a valuation allowance was necessary given the current and expected near term losses and the uncertainty with respect to its ability to generate sufficient profits from its business model.
Income tax expense for the years ended August 31, 2017 and 2016 is a follows:
| 2017 | 2016 | |||||||
| Current taxes: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| Foreign | 111,702 | - | ||||||
| 111,702 | - | |||||||
| Deferred taxes: | ||||||||
| Federal | - | - | ||||||
| State | - | - | ||||||
| Foreign | - | - | ||||||
| - | - | |||||||
| Total income tax expense | $ | 111,702 | $ | - | ||||
A reconciliation of the differences between the effective and statutory income tax rates are as follows:
Year Ended August 31, 2017
| Canada | United States | Total | ||||||||||||||||||||||
| Combined statutory tax rate | 39.0 | % | 40.0 | % | ||||||||||||||||||||
| Pretax loss | $ | (257,900 | ) | $ | (375,662 | ) | $ | (699,551 | ) | |||||||||||||||
| Expected income tax expense (benefit) | (100,581 | ) | -39.0 | % | (150,265 | ) | -40.0 | % | (276,582 | ) | ||||||||||||||
| Income tax from subsidiaries not part of consolidated return | 111,702 | 43.3 | % | - | 0.0 | % | 111,702 | |||||||||||||||||
| Stock based compensation | - | 0.0 | % | 100,971 | 26.9 | % | 100,971 | |||||||||||||||||
| Change in valuation allowance | 100,581 | 39.0 | % | 49,294 | 13.1 | % | 175,611 | |||||||||||||||||
| $ | 111,702 | 43.3 | % | $ | - | 0.0 | % | $ | 111,702 | 17.6 | % | |||||||||||||
Year Ended August 31, 2016
| Canada | United States | Total | ||||||||||||||||||||||
| Combined statutory tax rate | 39.0 | % | 40.0 | % | ||||||||||||||||||||
| Pretax loss | $ | (346,178 | ) | $ | - | $ | (346,178 | ) | ||||||||||||||||
| Expected income tax expense (benefit) | (135,009 | ) | -39.0 | % | (135,009 | ) | ||||||||||||||||||
| Change in valuation allowance | 135,009 | 39.0 | % | 135,009 | ||||||||||||||||||||
| $ | - | 0.0 | % | $ | - | 0.0 | % | $ | - | 0.0 | % | |||||||||||||
At August 31, 2017 and 2016, the significant components of the deferred tax assets are summarized below:
| 2017 | 2016 | |||||||
| Deferred income tax asset | ||||||||
| Net operating loss carryforwards | $ | 1,856,218 | $ | 1,391,467 | ||||
| Total deferred income tax asset | 1,856,218 | 1,391,467 | ||||||
| Less: valuation allowance | (1,856,218 | ) | (1,391,467 | ) | ||||
| Total deferred income tax asset | $ | - | $ | - | ||||
The valuation allowance for the years ended August 31, 2017 and 2016 increased by $464,751 and $132,876, respectively, as a result of the Company generating additional net operating losses and additional net operating losses resulting from the merger transaction.
The Company has recorded as of August 31, 2017 a valuation allowance of $1,856,218, as it believes that it is more likely than not that the deferred tax assets will not be realized in future years. Management has based its assessment on the Company’s lack of profitable operating history.
The Company conducts an analysis of its tax positions and has concluded that it has no uncertain tax positions as of August 31, 2017 and 2016.
The Company has net operating loss carry-forwards of approximately $738,000 and $3,887,000 in the United States and Canada, respectively. The use of the net operating losses in the United States may be significantly limited due to Internal Revenue Code section 382. The 2017, 2016 and 2015 tax years are still subject to audit.