11. Income taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled.

The provision for income taxes consisted of the following:


	March 31, 2025		March 31, 2024
	$		$
Current Provision
Federal	—		2
State	3		—
Total Current Provision	3		2

Deferred Provision
Federal	(2,392	)	(1,834	)
State	(810	)	—
Total Deferred Provision	(3,202	)	(1,834	)

Total Provision for Income Taxes	(3,199	)	(1,832	)

For the years ended March 31, 2025 and 2024, the income/(loss) before income taxes was $ (12,767) and ($14,685), respectively. The Company had an effective tax rate of 25.06% and 12.47% for the years ended March 31, 2025 and 2024, respectively.

The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended March 31, 2025 and 2024 were as follows:


	For the year ended
		March 31, 2025		March 31, 2025		March 31, 2024		March 31, 2024
		$				$
U.S. statutory rate		(2,681	)	21.00	%	(3,084	)	21.00	%
State taxes, net of federal		(770	)	6.03	%	(341	)	2.32	%
Difference in foreign tax rates		(105	)	0.82	%	(543	)	3.69	%
Return to provision		(1	)	0.00	%	—		0.00	%
Change in valuation allowance		2,347		(18.39	)%	1,635		(11.13	)%
Change in tax rates		—		0.00	%	(486	)	3.31	%
Non-deductible stock-based compensation		—		0.00	%	242		(1.65	)%
Non-deductible transaction costs		—		0.00	%	723		(4.92	)%
Tax credits		(1,583	)	12.40	%	—		0.00	%
Change in fair value of warrant liabilities		(876	)	6.86	%	—		0.00	%
Other permanent differences		468		(3.67	)%	23		(0.16	)%
Total tax (benefit) expense		(3,199	)	25.06	%	(1,832	)	12.47	%

The rate reconciliation was previously presented using the Canadian statutory tax rate. However, following the Company's redomiciliation from Canada to the U.S. during the year, the reconciliation now reflects the U.S. statutory tax rate. For consistency and comparison, the rate reconciliation for the year ended March 31, 2024, has been recalculated based on the U.S. statutory tax rate.

The table below presents the effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities as of March 31, 2025 and 2024:


	March 31, 2025		March 31, 2024
	$		$
Deferred income tax assets
Tax losses carried forward	43,049		40,659
Research and development expenses	10,928		8,522
Property, plant and equipment	—		523
Intangible assets	206		328
Financing expenses	—		169
Net federal investment tax credits	2,882		2,882
Other accruals and other	131		56
Orphan drug credit	1,583		—
Total deferred income tax assets	58,779		53,139
Valuation allowance	(49,530	)	(47,284	)
Total deferred income tax assets, net of valuation allowance	9,249		5,855

Deferred income tax liabilities
Intangible assets	(11,561	)	(11,369	)
Total deferred tax liabilities	(11,561	)	(11,369	)

Net deferred tax liabilities	(2,312	)	(5,514	)

The Company has U.S. Federal and State net operating loss carryforwards (“NOLs”) of approximately $18,621 and $18,621 and Canadian Federal and Quebec NOLs of $143,346 and $141,851, respectively, as of March 31, 2025. The Company’s U.S. Federal NOLs, generated after December 31, 2017, are available for indefinite carryforward; however, their utilization is limited to 80% of taxable income. State NOLs are subject to a 20-year carryforward period, with expirations beginning in 2038. The Company also has orphan drug tax credit totaling $1,583, which may be carried forward for 20 years and are set to begin expiring in 2045. Canadian and Quebec NOLs are scheduled to begin expiring in 2028, while scientific research and experimental development expenditures investment tax credit totaling $3,922 are set to begin expiring in 2029. Additionally, the Company has research and development expenses of $25,708 in Canada and $27,887 in Quebec, both of which are available for indefinite carryforward.

The utilization of the Company’s NOLs and research tax credit carryovers could be subject to annual limitations under Section 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), and similar state tax provisions, due to ownership change limitations that may have occurred previously or that could occur in the future. These ownership changes limit the amount of NOLs and other deferred tax assets that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383 of the Code, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percent points over a three-year period. The Company has not completed an analysis of an ownership change under Section 382 of the Code. To the extent that a study is completed and an ownership change is deemed to occur, the Company’s NOLs and tax credits could be limited.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a partial valuation allowance as of March 31, 2025 and March 31, 2024.

As a result of changes made by the Tax Cuts and Jobs Act of 2017, that became effective as of January 1, 2022, the Company is required to capitalize for tax purposes certain research and development expenses, and amortize domestic expenses over a 5-year period and foreign expenses over a 15-year period, resulting in a deferred tax asset for the capitalized amounts.

In accordance with ASC 740, Income Taxes, specifically related to uncertain tax positions, a company is required to use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company believes its income tax filing positions and deductions will be sustained upon examination, and accordingly, no reserves or related accruals for interest and penalties have been recorded as of March 31, 2025.

The Company is subject to taxation in the United States at both the federal level and within the state jurisdictions of New Jersey, Pennsylvania, and California. The Company is not currently under examination by any tax authority. The statute of limitations remains open for each tax year to the extent of the net operating losses generated in that year.

Government assistance

Government assistance is comprised of research and development investment tax credits receivable from the Quebec provincial government which relate to qualifiable research and development expenditures under the applicable tax laws. The amounts recorded as receivables are subject to a government tax audit and the final amounts received may differ from those recorded. For the years ended March 31, 2025 and 2024, the Company recorded ($0) and ($55), respectively, as a reduction of research and development expenses in the consolidated statements of operations and comprehensive loss.

	March 31, 2025	March 31, 2024
	$	$
Investment tax credit	—	356

Historical Timeline

Fiscal Year	Filed
2025	Jun 23, 2025	Showing above
2024	Jun 21, 2024

2023	Jun 23, 2023

2021	Jun 22, 2021

2020	Jun 29, 2020

About Income Taxes Disclosures

The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.

Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.

Grace Therapeutics, Inc. Income Taxes Disclosure

Historical Timeline

About Income Taxes Disclosures

Other Available Disclosures