SMTC Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Note 8 - Income Taxes

Note 8 - Income Taxes

12 Months Ended

Jan. 01, 2017

8.	Income taxes

The Company recorded the following income tax expense for the periods noted:

	Year ended January 1 , 2017			Year ended January 3, 2016		Year ended December 28, 2014
Current:
Federal/State	$	(63	)	$	28	$	113
Foreign		224			569		774

		161			597		887
Deferred:
Federal		—			—		1,000
Foreign		126			76		(65	)

		126			76		935

Income tax expense	$	287		$	673	$	1,822

The overall income tax expense as recorded in the consolidated statements of operations varied from the tax expense calculated using U.S. federal and state income tax rates as follows for the periods noted:

	Year ended January 1 , 2017			Year ended January 3, 2016			Year ended December 28, 2014
Federal income tax expense (recovery)	$	20		$	234		$	(720	)
State income tax expense (recovery), net of federal tax benefit		(62	)		29			58
Loss (income) of foreign subsidiaries taxed at different rates		(161	)		113			—
Change in valuation allowance		764			(2,205	)		(2,524	)
Additional (release of) income tax exposures and alternative minimum taxes		—			—			55
Reassessment of losses by tax authority		(1,675	)		—			—
Deemed income inclusion of foreign subsidiary		800			574			749
Expiry of operating loss carry forwards		439			843			3,142
Permanent and other differences		164			1,085			1,062

Income tax expense	$	287		$	673		$	1,822

Income (loss) before income taxes consisted of the following for the periods noted:

	Year ended January 1 , 2017			Year ended January 3, 2016			Year ended December 28, 2014
Domestic (U.S.)	$	(3,710	)	$	3,205		$	(1,267	)
Foreign (Non U.S.)		3,765			(2,536	)		(789	)

	$	55		$	669		$	(2,056	)

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. The Company’s deferred income tax liabilities and assets are comprised of the following at:

	January 1 , 2017			January 3, 2016
Deferred income tax assets:
Net operating loss carryforwards	$	23,844		$	24,595
Capital loss carryforwards		3,563			2,232
Tax credit carryforwards		3,407			4,307
Property, plant and equipment and other assets		2,015			1,812
Reserves, allowances and accruals		1,301			546

		34,130			33,492
Valuation allowance		(33,904	)		(33,140	)

Net deferred income tax assets	$	226		$	352

January

2017,

the Company had total net operating loss carry forwards of

$78.8

million, of which

$50.2

million,

$23.6

million and

$5.0

million pertains to federal loss carry forwards from U.S., Canadian and Asian jurisdictions respectively.

$1.3

million will expire in

2017,

$2.6

million will expire between

2018

and

2022,

$16.2

million will expire in

2023,

$9.8

million will expire between

2025

and

2029,

$20.2

million will expire in

2030

and the remainder will expire beyond

2030

with the exception of

$3.6

million which is available for indefinite carryforward.

January

2017

and

January

2016,

the Company had gross unrecognized tax benefits of

nil

and

$275,

respectively. During the year the Company recognized tax benefits of

$287

associated with uncertain tax positions which resulted in a favorable impact on the Company's effective tax rate.

Whether or not the recapitalization transactions undertaken in

2004

result in an ownership change for purposes of Section

382

of the Internal Revenue Code (“Section

382”),

which imposes a limitation on a corporation’s use of NOL carry forwards following an “ownership change,” depends upon whether the exchangeable shares of SMTC Canada are treated as shares of the Company under U.S. tax principles. The Company has concluded that the recapitalization transactions did not result in an ownership change and as such the use of the NOL carry forwards has not been limited.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its U.S. deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, change of control limitations, projected future taxable income and tax planning strategies in making this assessment. Guidance under ASC

740,

Income Taxes, (“ASC

740”)

states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years in the jurisdictions to which the deferred tax assets relate. In

2014,

it was determined by management that a full valuation allowance was required to be recorded against the remaining deferred tax assets associated with the U.S. jurisdiction as it was not likely to be realized. The Canadian jurisdiction continues to have a full valuation allowance recorded against the deferred tax assets. In

2015

and

2016,

management has concluded that a full valuation allowance is still required to be recorded against the Canadian, Asian and U.S jurisdiction deferred tax assets.