Gildan Activewear Inc. is a Canadian company that manufactures and sells activewear, socks, and underwear

Gildan Activewear Inc. is a Canadian company that manufactures and sells activewear, socks, and underwear. Manufacturing is primarily done in Honduras and Dominican Republic and sales are made worldwide.

Instructions

Through SEDAR (www.sedar.com) or Gildan’s website (www.gildan.com), obtain a copy of the company’s financial statements for its year ended October 4, 2009 (2009 year end), and answer the following questions.

(a) Review the Consolidated Statements of Earnings and Comprehensive Income for 2009 and 2008. What was the income tax expense for each year? Did the company apply intraperiod tax allocation in 2009 or 2008? Why or why not? How much does the company show as income taxes payable on the Balance Sheet for the fiscal year ends 2009 and 2008? What was paid for income taxes in 2009 and 2008, and where did you find this information? Why are the income taxes payable amounts and paid amounts significantly different for 2008 and 2009?

(b) What was the company’s effective tax rate for 2009? For 2008? What was the statutory rate in each of these years? What caused the differences? Be specific about whether the effective rate was increased or decreased as a result of each cause that you identify.

(c) For each future income tax account reported on the October 4, 2009 balance sheet, explain what underlies the balance that is reported. For each temporary difference, identify the balance sheet asset or liability where the tax basis and book value differ.

(d) What are the losses that the company has available to carry forward? When do these losses expire? How has the company accounted for these losses?

(a)         The amount of the income tax expense (recovery) for 2009 was a recovery of US$5,786,000 and for 2008 an expense of US$34,400,000.  The company did not use intraperiod tax allocation since it did not have any OCI items or discontinued operations.  The amount of income taxes payable for each fiscal year end was US$11,822,000 for 2009 and US$46,627,000 for 2008.  The amount of taxes paid during the 2009 and 2008 years was US$30,419,000 and US$5,867,000, respectively.  This information was found in Note 17(a) which was supplemental note to the company’s cash flow statement.

The reason for the significant differences between the income taxes payable for 2008 and 2009 relate to the reassessment by CRA that was finalized in December, 2008 (as described in Note 14).  As a result of this assessment, the company paid US$24.6 million in 2009.  This reassessment would have been included in the income taxes payable at 2008.

(b)         The statutory tax rates and effective tax rates for 2009 and 2008 are presented below. There are significant differences between the rates in both years. The main item thatcaused the effective rate to be morethan the statutory rate in 2007 was

(US$ in thousands )	2009 %	2008 %
Canadian Statutory rate	31.1	31.1
Reduction due to tax rates in foreign subsidiaries	-36.0	-28.4
Income tax (recovery) charge for prior year’s taxation	-6.8	14.8
Effect of non-deductible expenses and other	5.1	1.5
Total	-6.6	19

The first large reduction in both years results from the company having foreign subsidiaries operating in jurisdictions with substantially lower tax rates than Canada.  The large increase in 2008, results from a tax reassessment.  As disclosed in Note 14, the company was reassessed in 2008 by CRAfor fiscal years 2000, 2001, 2002 and 2003.  Under dispute was the company’s transfer pricing and allocation of income between Canadian operations (paying tax at 31%) and its foreign subsidiaries (which pay significantly lower tax rates as can be seen by the reductions above).  In 1999, the company had restructured its international wholesale operations and related assets to its Barbados subsidiary, which resulted in the transfer pricing (and transfer of profits from Canada to Barbados) to be questioned by CRA.  This reassessment was settled, resulting in a charge to current income taxes in 2008 of US$ 26.9 million and a reclassification of future income tax liabilities to income taxes payable. In 2009, the company was also reassessed for 2004 to 2006 taxation years, but no significant differences were found. 

Finally, there are small adjustments in the statutory rate to reflect non-deductible expenses and other.

(c)         A schedule of the future tax balances reported on the 2009 balance sheet along with their causes and the related asset or liability with different tax and book values is reported below.  Where there is no related asset or liability, the classification of the tax balance would be based on when therelated temporary difference was expected to reverse.

Amounts in thousands of US$

Underlying item	Amount	Balance sheet item
Non capital losses	9,261	N/A – for loss carry forwards
Reserves and accruals	5,094	No details given
Other	2,653	No details given
Valuation allowance	(2,579)	Reduction of losses to “more likely than not
Property, plant, and equipment, intangibles and other	(30,283)	PP&E and intangible accounts
Total	(15,854)

This balance has been classified as Assets – non-current US$ 7.91 million and Liabilities – non-current US$23.764 million.  There are no current future income tax accounts.

 (d) Gildan has loss carry forwards for Canadian taxes of CAD$9.8 million and US taxes of US$20.3 million.  These losses expire between 2022 and 2029.  The company has recorded some amount as a benefit:  The total loss benefit of US$9.261 has been reduced by a valuation allowance of US$2.579 million, for a net benefit of US$6.682 million which has been included in future income tax assets.