Annual reports filed by certain Canadian issuers pursuant to Section 15(d) and Rule 15d-4

TAXATION

v3.22.1
TAXATION
12 Months Ended
Dec. 31, 2021
TAXATION  
TAXATION

17. TAXATION

The Company is a Canadian corporation and is classified as a U.S. domestic corporation for U.S. federal income tax purposes under the Section 7874(b) “inversion” rules of the U.S. Tax Code therefore is subject to taxation both in Canada and the United States. The Company maintains all of its operations in the United States. As the Company operates in the cannabis industry, it is subject to the limitations of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.

The domestic and foreign components of loss before income taxes for the years ended December 31, 2021 and 2020 are as follows:

Year Ended

    

2021

    

2020

Domestic

$

23,500,189

$

6,426,623

Foreign

 

(11,191,729)

 

(8,944,609)

Income (loss) before income taxes

 

12,308,460

 

(2,517,986)

17. TAXATION (Continued)

For the years ended December 31, 2021 and 2020 income taxes expense consisted of:

Year Ended 

    

2021

    

2020

Current taxes:

    

  

    

  

Federal

$

38,461,470

$

18,957,490

State

 

7,358,780

 

2,813,100

Total Current

45,820,250

21,770,590

Deferred taxes:

 

 

Federal

(13,414,139)

110,928

State

 

(3,145,200)

 

205,945

Foreign

(2,980,526)

(1,386,577)

Change in valuation allowance

2,980,526

1,386,577

Total Deferred

(16,559,339)

316,873

Total income tax expense:

$

29,260,911

$

22,087,463

The difference between the income tax expense for the years ended December 31, 2021 and 2020 and the expected income taxes based on the statutory tax rate applied to income (loss) before income tax as follows:

    

Years Ended

    

2021

    

2020

Income (Loss) before income taxes

    

$

12,308,460

$

(2,517,986)

Statutory tax rates

 

21

%  

 

21

%

Expense (Recovery) based on statutory rates

 

2,584,776

(528,777)

Foreign tax rate differential

 

(671,504)

(536,978)

State taxes

 

4,981,840

2,990,031

Acquisitions costs

 

1,856,910

491,748

Non-deductible expenses

 

18,235,273

18,705,349

Tax rate change

 

(767,185)

206,828

Change in valuation allowance

2,980,526

1,386,577

Other differences

60,275

(627,315)

Income tax expense

$

29,260,911

$

22,087,463

17. TAXATION (Continued)

At December 31, 2021 and 2020, the components of deferred tax assets and liabilities were as follows:

   

Year Ended December 31, 

   

2021

   

2020

Deferred tax assets

Net operating losses

$

7,966,924

$

4,686,002

Share issuance costs

2,245,164

2,598,470

Investments

34,185

146,724

Inventory

153,007

161,508

Other assets

1,051,992

50,782

Total deferred tax assets

11,451,272

7,643,486

Valuation allowance

(8,552,068)

(5,571,542)

Total deferred tax assets

2,899,204

2,071,944

Deferred tax liabilities

Depreciation

$

(6,071,445)

$

(81,156)

Amortization

(64,197,066)

(14,905,067)

Debt financing costs

(1,821,085)

(1,713,700)

Other liabilities

(890,927)

(50,012)

Total deferred tax liabilities

(72,980,523)

(16,749,935)

Net deferred tax liabilities

$

(70,081,319)

$

(14,677,991)

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company assesses the positive and negative evidence to determine if sufficient future taxable income is expected to be generated to use the existing deferred tax assets. On the basis of our assessment, the valuation allowance increased $3.0 million and $1.4 million, respectively, as of December 31, 2021 and 2020.

As of December 31, 2021 and 2020, Ayr had $29.5 million and $17.4 million, respectively of gross Canadian net operating loss carryforwards which will begin expire to in 2038.

The Company operates in a number of United States state tax jurisdictions and is subject to examination of its income tax returns by tax authorities in those jurisdictions who may challenge any item on these returns. Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. In accordance with ASC 740—Income Taxes, the Company recognizes the benefits of uncertain tax positions in our financial statements only after determining that it is more likely than not that the uncertain tax positions will be sustained.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. There are no positions for which it is reasonably possible that the uncertain tax benefit will significantly increase or decrease within twelve months. Ayr files income tax returns in the United States, various state jurisdictions, and Canada, which remain open to examination by the respective jurisdictions for the 2018 tax year to the present.