IPSCO 2006 Annual Report

Form 10K - Note 7 page 1/1

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7 Income Taxes

a) The components of income before income taxes are summarized below:

	2006		2005		2004
Canada	$	246,027	$	383,236	$	281,944
United States	748,964		500,309		336,913
	$	994,991	$	883,545	$	618,857

An internal reorganization of certain of the consolidated entities completed in 2005 has resulted in a shift of income before income taxes from Canada to the United States in 2006.

b) The provision (benefit) for income taxes is summarized as follows:

	2006			2005		2004
Current
Canada	$	77,704		$	109,988	$	85,786
U.S. Federal	262,137			109,817		6,019
U.S. State	29,387			6,116		413
	369,228			225,921		92,218
Deferred
Canada	(8,777		)	5,149		6,526
U.S. Federal	(6,142		)	62,381		71,717
U.S. State	(2,432		)	4,278		7,704
	(17,351		)	71,808		85,947
	$	351,877		$	297,729	$	178,165

c) The corporate income tax rate is determined using the Canadian federal and provincial tax rates applicable to the parent company. Income tax expense differs from the amount computed by applying the corporate income tax rates to income before income taxes. The reasons for this difference are as follows:

	2006			2005			2004
Corporate income tax rate	32.9		%	34.2		%	34.9		%
Provision for income taxes based on corporate income tax rate	$	327,054		$	302,172		$	216,043
Increase (decrease) in taxes resulting from Income taxed at different provincial rates	428			(3,784		)	(5,141		)
Canadian large corporation tax	—			192			2,576
Research and development credit	(4,238		)	—			—
Income taxed at different rates in the United States	15,995			3,464			304
U.S. state income tax	26,955			10,393			8,116
U.S. manufacturing deduction	(8,385		)	—			—
U.S. extra-territorial income exclusion	(3,255		)	(6,858		)	—
Recognition of capital gains/(losses)	2,840			(39,768		)	—
Change in valuation allowance on capital losses	(7,237		)	39,768			—
Change in valuation allowance on operating losses	—			—			(43,694		)
Impact of income tax rate changes	2,515			—			—
Other	(795		)	(7,850		)	(39		)
	$	351,877		$	297,729		$	178,165

Cash tax payments of $426,095, $271,700, and $22,527 were made for the years ended December 31, 2006, December 31, 2005, and December 31, 2004 respectively.

d) Deferred income taxes are comprised of the following:

	2006			2005
Deferred tax assets
Accounting provisions not currently deductible for tax purposes	$	46,579		$	26,731
Costs capitalized to inventory for tax purposes	3,419			3,496
Capital loss carry-forwards	36,928			39,768
Pension expense in excess of contributions	14,769			6,444
Other	570			3,230
Gross deferred tax assets	102,265			79,669
Valuation allowance on capital loss carry-forward	(32,531		)	(39,768		)
Total net deferred tax assets	69,734			39,901
Deferred tax liabilities
Tax depreciation in excess of accounting depreciation	201,319			190,569
Basis difference relating to the acquisition of NS Group	311,503			—
Foreign exchange gains on debt	4,397			6,478
Other	2,878			4,600
Total deferred tax liabilities	520,097			201,647
Net deferred tax liability	$	450,363		$	161,746
The net deferred tax liability is comprised of the following components:
Short-term deferred tax asset	$	40,689		$	30,227
Long-term deferred tax liability	491,052			191,973
Net deferred tax liability	$	450,363		$	161,746

e) During 2006, repayment of intercompany debt resulted in a Canadian subsidiary realizing a capital gain. The resulting gain decreased the capital loss carryforward. In addition, the Company determined that at December 31, 2006, it would be able to realize an additional $4,397 of the capital loss in the future and reduced the valuation allowance recorded against the capital loss by this amount.

Undistributed earnings of certain consolidated U.S. subsidiaries at December 31, 2006 amounted to $834,008. No provision for deferred income taxes has been made for these earnings because the Company intends to permanently reinvest such earnings in those operations. If such earnings were not permanently reinvested, a deferred tax liability of $41,700 would have been recorded.

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