NOVANTA INC Income Taxes Disclosure
16. Income Taxes
Components of the Company’s income (loss) before income taxes for the periods indicated are as follows (in thousands):
|
Year Ended December 31, |
|
|||||||||
|
2025 |
|
|
2024 |
|
|
2023 |
|
|||
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|||
Canada |
$ |
(1,250 |
) |
|
$ |
(7,425 |
) |
|
$ |
(6,490 |
) |
U.S. |
|
(22,890 |
) |
|
|
11,829 |
|
|
|
38,992 |
|
Other |
|
93,782 |
|
|
|
74,662 |
|
|
|
51,246 |
|
Total |
$ |
69,642 |
|
|
$ |
79,066 |
|
|
$ |
83,748 |
|
Components of the Company’s income tax provision (benefit) for the periods indicated are as follows (in thousands):
|
Year Ended December 31, |
|
|||||||||
|
2025 |
|
|
2024 |
|
|
2023 |
|
|||
Current |
|
|
|
|
|
|
|
|
|||
Canada |
$ |
11 |
|
|
$ |
43 |
|
|
$ |
59 |
|
U.S. |
|
1,733 |
|
|
|
11,198 |
|
|
|
14,424 |
|
Other |
|
22,922 |
|
|
|
19,647 |
|
|
|
11,113 |
|
|
|
24,666 |
|
|
|
30,888 |
|
|
|
25,596 |
|
Deferred |
|
|
|
|
|
|
|
|
|||
Canada |
|
— |
|
|
|
— |
|
|
|
— |
|
U.S. |
|
(5,124 |
) |
|
|
(12,612 |
) |
|
|
(12,224 |
) |
Other |
|
(3,729 |
) |
|
|
(3,297 |
) |
|
|
(2,502 |
) |
|
|
(8,853 |
) |
|
|
(15,909 |
) |
|
|
(14,726 |
) |
Total |
$ |
15,813 |
|
|
$ |
14,979 |
|
|
$ |
10,870 |
|
The Company is incorporated in Canada and therefore uses the Canadian statutory rate for income tax disclosure. Below is a tabular reconciliation of the Canadian federal-only statutory income tax rate to the Company's effective tax rate for the year ended December 31, 2025 in accordance with the amendments in ASU 2023-09:
|
Year Ended |
|
||||
|
December 31, 2025 |
|
||||
|
Amount |
|
Percentage |
|
||
Canada statutory tax rate |
$ |
10,446 |
|
|
15.0 |
% |
Provincial and local income taxes |
|
— |
|
|
0.0 |
% |
Foreign tax effects |
|
|
|
|
||
United States |
|
|
|
|
||
R&D tax credits |
|
(2,410 |
) |
|
(3.5 |
)% |
Effect of rates different than statutory |
|
(1,471 |
) |
|
(2.1 |
)% |
Foreign-derived intangible income |
|
(740 |
) |
|
(1.0 |
)% |
Base Erosion and Anti-Abuse Tax |
|
1,549 |
|
|
2.2 |
% |
Disallowed compensation |
|
1,896 |
|
|
2.7 |
% |
Return to provision adjustments |
|
677 |
|
|
1.0 |
% |
Other |
|
640 |
|
|
0.9 |
% |
United Kingdom |
|
|
|
|
||
UK patent box |
|
(6,652 |
) |
|
(9.6 |
)% |
Effect of rates different than statutory |
|
4,155 |
|
|
6.0 |
% |
Pillar 2 |
|
1,031 |
|
|
1.5 |
% |
Other |
|
22 |
|
|
0.0 |
% |
Germany |
|
|
|
|
||
Trade tax |
|
4,162 |
|
|
6.0 |
% |
Other |
|
(105 |
) |
|
(0.1 |
)% |
China |
|
|
|
|
||
Effect of rates different than statutory |
|
1,695 |
|
|
2.4 |
% |
Withholding taxes |
|
1,144 |
|
|
1.6 |
% |
Other |
|
63 |
|
|
0.1 |
% |
Other foreign jurisdictions |
|
224 |
|
|
0.3 |
% |
Effect of cross-border tax laws |
|
— |
|
|
0.0 |
% |
Tax credits |
|
— |
|
|
0.0 |
% |
Changes in valuation allowances |
|
(145 |
) |
|
(0.2 |
)% |
Nontaxable or nondeductible items |
|
|
|
|
||
Other |
|
356 |
|
|
0.5 |
% |
Changes in unrecognized tax benefits |
|
(704 |
) |
|
(1.0 |
)% |
Other adjustments |
|
|
|
|
||
Withholding and Other taxes |
|
(20 |
) |
|
(0.0 |
)% |
Effective tax rate |
$ |
15,813 |
|
|
22.7 |
% |
Below is a reconciliation of the statutory Canadian federal plus provincial tax rate to the effective tax rate related to income before income taxes for the periods indicated is as follows (in thousands, except percentage data), as presented in prior period financial statements:
|
Year Ended December 31, |
|
|||||
|
2024 |
|
|
2023 |
|
||
Statutory Canadian tax rate |
|
29.00 |
% |
|
|
29.00 |
% |
Expected income tax provision at Canadian statutory tax rate |
$ |
22,929 |
|
|
$ |
24,287 |
|
U.S. state income taxes, net |
|
(168 |
) |
|
|
860 |
|
U.K. patent box |
|
(3,982 |
) |
|
|
(4,247 |
) |
Foreign-derived intangible income |
|
(3,015 |
) |
|
|
(4,500 |
) |
International tax rate differences |
|
(2,622 |
) |
|
|
(4,804 |
) |
Tax credits |
|
(2,590 |
) |
|
|
(3,602 |
) |
Change in valuation allowance |
|
1,930 |
|
|
|
2,068 |
|
Disallowed compensation |
|
1,678 |
|
|
|
2,571 |
|
Withholding and other taxes |
|
854 |
|
|
|
300 |
|
Windfall benefit from share-based compensation |
|
(844 |
) |
|
|
(1,685 |
) |
Transaction costs and permanent differences |
|
360 |
|
|
|
423 |
|
Uncertain tax positions |
|
244 |
|
|
|
90 |
|
Provision to return differences |
|
231 |
|
|
|
(1,056 |
) |
Acquisition contingent consideration adjustments |
|
(81 |
) |
|
|
— |
|
Statutory tax rate changes |
|
55 |
|
|
|
165 |
|
Reported income tax provision |
$ |
14,979 |
|
|
$ |
10,870 |
|
Effective tax rate |
|
18.9 |
% |
|
|
13.0 |
% |
Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items and operating loss and tax credit carryforwards for financial and tax reporting purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2025 and December 31, 2024 are as follows (in thousands):
|
December 31, |
|
|||||
|
2025 |
|
|
2024 |
|
||
Deferred tax assets: |
|
|
|
|
|
||
Capitalized R&D |
$ |
40,043 |
|
|
$ |
34,777 |
|
Inventories |
|
16,270 |
|
|
|
15,451 |
|
Losses |
|
13,456 |
|
|
|
12,606 |
|
Compensation related deductions |
|
7,827 |
|
|
|
9,323 |
|
Operating lease liabilities |
|
8,703 |
|
|
|
9,120 |
|
Tax credits |
|
4,821 |
|
|
|
3,260 |
|
Deferred tangible equity unit financing fee |
|
3,715 |
|
|
|
— |
|
Business interest expense |
|
55 |
|
|
|
1,483 |
|
Other |
|
1,922 |
|
|
|
974 |
|
Warranty |
|
665 |
|
|
|
913 |
|
Total deferred tax assets |
|
97,477 |
|
|
|
87,907 |
|
Valuation allowance on deferred tax assets |
|
(23,212 |
) |
|
|
(18,594 |
) |
Net deferred tax assets |
$ |
74,265 |
|
|
$ |
69,313 |
|
Deferred tax liabilities: |
|
|
|
|
|
||
Amortization |
$ |
(43,771 |
) |
|
$ |
(39,061 |
) |
Operating lease right-of-use assets |
|
(7,831 |
) |
|
|
(8,110 |
) |
Depreciation |
|
(5,879 |
) |
|
|
(6,307 |
) |
Deferred revenue |
|
(7,495 |
) |
|
|
(6,041 |
) |
Total deferred tax liabilities |
$ |
(64,976 |
) |
|
$ |
(59,519 |
) |
Net deferred tax assets (liabilities) |
$ |
9,289 |
|
|
$ |
9,794 |
|
Income taxes paid, net of refunds received, were as follows:
|
Year Ended |
|
|
|
December 31, 2025 |
|
|
Federal - Canada |
$ |
— |
|
Provincial - Canada |
|
— |
|
Foreign |
|
36,725 |
|
|
|
|
|
Total |
$ |
36,725 |
|
|
|
|
|
Income taxes paid (net of refunds) exceeded 5 percent of total income taxes paid (net of refunds) in the following jurisdictions: |
|
|
|
|
|
|
|
Foreign: |
|
|
|
Germany corporate income taxes |
$ |
12,653 |
|
Germany trade taxes |
|
9,893 |
|
China |
|
5,257 |
|
United Kingdom |
|
3,652 |
|
United States - federal taxes |
|
814 |
|
United States - state taxes |
|
484 |
|
In determining its income tax provisions, the Company calculated deferred tax assets and liabilities for each separate jurisdiction. The Company then considered a number of factors, including positive and negative evidence related to the realization of its deferred tax assets, to determine whether a valuation allowance should be recognized with respect to its deferred tax assets.
The Company began to capitalize research and development (“R&D”) expenditures in 2022 in accordance with the Tax Cuts and Jobs Act of 2017 (“TCJA”) which requires that R&D expenditures be capitalized and amortized for income tax purposes over five years for domestic research and fifteen years for foreign research, rather than being deducted as incurred. This has the effect of increasing the Company’s cash taxes and deferred tax assets. In 2025 the Company’s deferred tax assets related to capitalized R&D expenditure increased $5.3 million, which also creates an effective tax rate benefit of 1.0% by increasing the Company's Foreign Derived Intangible Income deduction.
In 2025, the Company recorded an additional $4.6 million of valuation allowance. In 2024, the Company recorded an additional $1.9 million of valuation allowance.
As of December 31, 2025, the Company had valuation allowances on Canada net operating and capital loss carryforwards, U.K. capital loss carryforwards, certain U.S. state net operating losses, and state and foreign tax credits where the Company has determined that it is not more likely than not the future benefit would be realized. In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company continuously reassesses the possibility of releasing the valuation allowance currently in place on its deferred tax assets.
As of December 31, 2025, the Company had net operating loss carry forwards of $7.6 million (tax effected). Of this amount, approximately $7.1 million relates to Canada and begins to expire starting in 2033 and had a full valuation allowance. The remainder $0.5 million relates to various U.S. jurisdictions, which will begin to expire in 2026 through 2045. In addition, the Company had capital loss carryforwards of $5.9 million, which can be carried forward indefinitely and had a full valuation allowance. Of this amount, $4.9 million, and $1.0 million related to Canada, and the U.K., respectively.
As of December 31, 2024, the Company had net operating loss carry forwards of $6.8 million (tax effected). Of this amount, approximately $6.5 million relates to Canada and begins to expire starting in 2033 and had a full valuation allowance. The remainder $0.3 million relates to various U.S. jurisdictions, of which $0.1 million can be carried forward indefinitely and the remaining $0.2 million will begin to expire in 2025 through 2036, on which the Company records a valuation allowance of $0.1 million. In addition, the Company had capital loss carryforwards of $5.8 million, which can be carried forward indefinitely and had a full valuation allowance. Of this amount, $4.9 million, $0.8 million and $0.1 million relates to Canada, the U.K and other foreign jurisdictions, respectively.
As of December 31, 2025, the Company had tax credit carryforwards of approximately $5.8 million, before accounting for $1.0 million of uncertain tax positions recorded against the credit carryforward. Approximately $1.5 million relate to U.S. Federal credits which will expire in 2045, and $2.7 million relate to U.S. state credits and will expire through 2046, and on which the Company maintains a full valuation allowance. $0.5 million relates to the U.S. Federal foreign tax credits which will expire through 2034, and on which the Company maintains a full valuation allowance. Approximately $0.4 million relate to other foreign jurisdictions. The remaining $0.7 million tax credit carryforwards were related to Canada and can be carried forward indefinitely. The Canadian credit carryforwards also have a full valuation allowance recorded against them.
As of December 31, 2024, the Company had tax credit carryforwards of approximately $3.8 million, before accounting for $0.6 million of uncertain tax positions recorded against the credit carryforward. Approximately $2.6 million relates to U.S. state credits and will expire through 2039, and on which the Company maintains a full valuation allowance, $0.5 million relates to the U.S. federal foreign tax credits which will expire through 2034. The remaining $0.7 million relates to Canada and can be carried forward indefinitely. The U.S. federal and Canadian tax credit carryforwards also have a full valuation allowance recorded against them.
As of December 31, 2025, the Company had disallowed business interest expense carryforwards of $0.1 million under Section 163(j) of the Internal Revenue Code. These carryforwards have no expiration date and can be utilized indefinitely to offset future taxable income, subject to the limitations of Section 163(j).
As of December 31, 2024, the Company had disallowed business interest expense carryforwards of $1.5 million under Section 163(j) of the Internal Revenue Code. These carryforwards have no expiration date and can be utilized indefinitely to offset future taxable income, subject to the limitations of Section 163(j).
Income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are essentially permanent in nature. This amount becomes taxable upon the repatriation of assets from a subsidiary or a sale or liquidation of a subsidiary. The estimated unrecognized income tax and foreign withholding tax liability on these undistributed earnings is approximately $5.4 million.
As of December 31, 2025, the Company’s total amount of gross unrecognized tax benefits was $4.4 million of which $3.7 million would favorably affect the effective tax rate if benefited. The Company believes there are no jurisdictions in which the outcome of unresolved issues or claims is likely to be material to its results of operations, financial position or cash flows. Furthermore, the Company believes that it has adequately provided for all significant income tax uncertainties.
The reconciliation of the total amounts of unrecognized tax benefits is as follows (in thousands):
Balance at December 31, 2022 |
$ |
4,249 |
|
Additions based on tax positions related to the current year |
|
561 |
|
Additions for tax positions of prior years |
|
47 |
|
Reductions to tax positions of prior years |
|
(22 |
) |
Reductions to tax positions resulting from a lapse of the applicable statute of limitations |
|
(492 |
) |
Settlements with tax authorities |
|
— |
|
Balance at December 31, 2023 |
|
4,343 |
|
Additions based on tax positions related to the current year |
|
949 |
|
Additions for tax positions of prior years |
|
204 |
|
Reductions to tax positions of prior years |
|
(42 |
) |
Reductions to tax positions resulting from a lapse of the applicable statute of limitations |
|
(615 |
) |
Settlements with tax authorities |
|
— |
|
Balance at December 31, 2024 |
|
4,839 |
|
Additions based on tax positions related to the current year |
|
697 |
|
Additions for tax positions of prior years |
|
70 |
|
Reductions to tax positions of prior years |
|
(101 |
) |
Reductions to tax positions resulting from a lapse of the applicable statute of limitations |
|
(1,131 |
) |
Settlements with tax authorities |
|
— |
|
Balance at December 31, 2025 |
$ |
4,374 |
|
The Company recognizes interest and penalties related to uncertain tax positions in income tax provision. As of December 31, 2025 and 2024, the Company had approximately $0.7 million and $0.8 million, respectively, of accrued interest and penalties related to uncertain tax positions. During the years ended December 31, 2025, December 31, 2024 and December 31, 2023, the Company recognized $(0.1) million, $0.1 million and $0.1 million, respectively, of expense for an increase in interest and penalties related to uncertain tax positions.
The Company files income tax returns in Canada, the U.S., and various foreign jurisdictions. Generally, the Company is no longer subject to U.S. or foreign income tax examinations, including transfer pricing tax audits, by tax authorities for the years before 2015.
The Company’s income tax returns may be reviewed by tax authorities in the following countries for the following periods under the appropriate statute of limitations:
United States |
2019 - Present |
Canada |
2021 - Present |
United Kingdom |
2024 - Present |
Germany |
2021 - Present |
Czech Republic |
2022 - Present |
China |
2015 - Present |
Japan |
2020 - Present |
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 23, 2026 | Showing above |
| 2024 | Feb 25, 2025 | |
| 2023 | Feb 28, 2024 | |
| 2022 | Mar 1, 2023 | |
| 2021 | Mar 1, 2022 | |
| 2020 | Mar 1, 2021 | |
| 2019 | Feb 26, 2020 | |
| 2018 | Feb 27, 2019 | |
| 2017 | Feb 28, 2018 | |
| 2016 | Mar 6, 2017 | |
| 2015 | Mar 2, 2016 | |
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.