Versus Systems Inc. Income Taxes Disclosure

11.	INCOME TAXES

 

a)

Provision for Income Taxes

 

The components of loss before income taxes are as follows:

 

		Year Ended December 31,
		2024				2023
Domestic		$	(3,019,430	)		$	(8,925,899	)
Foreign			(1,531,180	)			(1,586,258	)
Total		$	(4,550,610	)		$	(10,512,157	)

 

For purposes of reconciling the Company’s provision for income taxes at the statutory rate and the Company’s provision (benefit) for income taxes at the effective tax rate, a notional 27% tax rate was applied as follows:

 

		2024				2023
		($)				($)
Loss before income taxes for the year			(4,550,610	)			(10,512,157	)
Income tax at federal statutory rate			(1,248,000	)			(2,838,000	)
Increase (decrease) in tax resulting from:
Change in statutory, foreign tax, foreign exchange rates and other			185,000				536,000
Permanent differences			36,000				(218,000	)
Foreign exchange			732,000				-
California minimum tax			800				-
Late filing penalty			24,426				-
Change in unrecognized deductible temporary differences			125,000				2,686,000
Other			169,000				(166,000	)
Income tax expense			24,226				-

 

The difference between the statutory federal income tax rate and the Company’s effective tax rate in 2024, and 2023 is primarily attributable to the difference between the U.S. and foreign tax rates, true up of deferred taxes, other non-deductible permanent items, and change in valuation allowance. Note that the statutory rate will be the US rate as the parent (filer) is domiciled in United States as of December 31, 2024.

 

The net deferred tax assets (liabilities) are comprised of the following:

 

		2024				2023(1)
		($)				($)
Deferred tax assets:
Non-capital losses carry-forward			18,198,000				15,769,000
Share issuance costs			733,000				733,000
Other deferred			51,000				1,000
Allowable capital losses			3,350,000				3,635,000
Property and equipment			55,000				77,000
Valuation allowance			(22,387,000	)			(20,215,000	)
Total deferred income taxes			-				-

 

(1)

Certain adjustments have been made to the numbers reported in the Form 10-K for the year ended December 31, 2023, to reflect the revision of immaterial presentation errors in the prior period primarily due to the incorrect recognition of a deferred tax asset and offsetting valuation allowance for the Company’s exploration and evaluation assets and intangible assets.

 

A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2024. Such objective evidence limits the ability to consider other subjective evidence such as its projections for future growth. On the basis of this evaluation, at December 31, 2024 and 2023, a valuation allowance of $22.4 million and $22.3 million, respectively, has been recorded.

As of December 31, 2024, the Company has accumulated federal and Canadian net operating loss (“NOL”) carryforwards of $80.3 million and $12.4 million, respectively.

 

Pursuant to the Internal Revenue Code of 1986, as amended (“IRC”), specifically Sections 382 and 383, the Company’s ability to use tax attribute carryforwards to offset future taxable income is limited if the Company experiences a cumulative change in ownership of more than 50% within a three-year testing period. The Company has not completed an ownership change analysis pursuant to IRC Section 382 therefore the ability to offset taxable income in the future may be impacted by ownership changes occurring prior to December 31, 2024. If ownership changes within the meaning of IRC Section 382 occur in the future, the amount of remaining tax attribute carryforwards available to offset future taxable income and income tax expense in future years may be significantly restricted or eliminated. Further, the Company’s deferred tax assets associated with such tax attributes could be significantly reduced or eliminated upon realization of an ownership change within the meaning of IRC Section 382. If eliminated, the related asset would be removed from the deferred tax asset schedule, with a corresponding reduction in the valuation allowance. Additionally, limitations on the utilization of the Company’s tax attribute carryforwards can increase the amount of taxable income and current income tax expense recognized. Due to the existence of the valuation allowance, ownership change limitations that are not significant may not impact the Company’s effective tax rate.

 

The significant components of the Company’s temporary differences, unused tax credits and unused tax losses that have not been included on the consolidated balance sheets are as follows:

 

Temporary Differences		2024				Expiry Date Range		2023				Expiry Date Range
		($)						($)
Non-capital losses available for future periods - US			48,716,000			2036 to indefinite			45,697,000			2036 to indefinite
Non-capital losses available for future periods - Canada			24,393,000			2026 to 2044			22,862,000			2026 to 2043
Allowable capital losses			13,643,000			No expiry date			13,463,000			No expiry date
Property and equipment			280,000			No expiry date			280,000			No expiry date
Intangible assets			9,747,000			No expiry date			9,747,000			No expiry date
Exploration and evaluation assets			5,446,000			No expiry date			5,446,000			No expiry date
Share issuance costs			2,715,000			No expiry date			2,715,000			No expiry date

 

The Company is subject to taxation in the United States and various states along with other foreign countries. The Company has not been notified that it is under audit by the IRS or any state, however, due to the presence of NOL carryforwards, all the income tax years remain open for examination in each of these jurisdictions. There are no audits in any foreign jurisdictions. The Company does not believe that it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease in the next 12 months.

 

Deferred income taxes have not been provided for undistributed earnings of the Company’s consolidated foreign subsidiaries because of the Company’s intent to reinvest such earnings indefinitely in active foreign operations.

 

Tax attributes are subject to review, and potential adjustment, by tax authorities. The Company files income tax returns with Canada, U.S. and state governments. With few exceptions, the Company is no longer subject to tax examinations by tax authorities for years before 2022.