10. INCOME TAX

[a] The reconciliation of income tax attributable to operations computed at the statutory tax rate to income tax expense is as follows. OncoGenex Technologies, a Canadian corporation, which is subject to combined Canadian federal and provincial statutory tax rates for December 31, 2012, 2011, and 2010 of 25.0%, 26.5%, and 28.5%, respectively. Following the reverse takeover by OncoGenex Technologies of Sonus Pharmaceuticals, Inc. (which subsequently changed its name to OncoGenex Pharmaceuticals, Inc.) in 2008, OncoGenex Technologies became a wholly owned subsidiary of the Company, which is a Delaware incorporated company subject to US Federal Statutory rates of 34% for all three years presented.

For the purposes of estimating the tax rate in effect at the time that deferred tax assets and liabilities are expected to reverse, management uses the furthest out available future tax rate in the applicable jurisdictions. For the years ended December 31, 2012, 2011 and 2010 the future Canadian enacted rates the Company used were 25%, 25%, and 25%, respectively, while for the US the future enacted rate the Company used was 34% for all three periods presented.

[b] At December 31, 2012, the Company has investment tax credits of $2.0 million (2011—$1.3 million) available to reduce future Canadian income taxes otherwise payable. The Company also has non-capital loss carryforwards of $58.3 million (2011—$41.1 million) available to offset future taxable income in Canada and federal net operating loss carryforwards of $141.5 million (2011 $133.1 million) to offset future taxable income in the United States.

Under Section 382 of the Internal Revenue Code of 1986, substantial changes in the Company’s ownership may limit the amount of net operating loss carryforwards and development tax credit carryforwards that could be utilized annually in the future to offset taxable income. Any such annual limitation may significantly reduce the utilization of the net operating losses and tax credits before they expire. The Company has not completed a Section 382 study at this time to determine the impact ownership changes have had on its carryforwards. In each period since the Company’s inception, it has recorded a valuation allowance for the full amount of its deferred tax asset, as the realization of the deferred tax asset is uncertain.

As a result, the Company had not recognized any federal or state income tax benefit in its statement of operations. The initial public offering of common stock by the Company in 1995 caused an ownership change pursuant to applicable regulations in effect under the Internal Revenue Code of 1986. Therefore, the Company’s use of losses incurred through the date of ownership change will be limited during the carryforward period and may result in the expiration of net operating loss carryforwards in the United States before utilization.

The investment tax credits and non-capital losses and net operating losses for income tax purposes expire as follows (in thousands):

In addition, the Company has unclaimed tax deductions of approximately $12.9 million related to scientific research and experimental development expenditures available to carry forward indefinitely to reduce Canadian taxable income of future years. The Company also has research and development tax credits of $1.7 million available to reduce future taxes payable in the United States. The research and development tax credits expire between 2013 and 2028

[c] Significant components of the Company’s deferred tax assets as of December 31 are shown below (in thousands):

The potential income tax benefits relating to these deferred tax assets have not been recognized in the accounts as their realization did not meet the requirements of “more likely than not” under the liability method of tax allocation. Accordingly, a valuation allowance has been recorded and no deferred tax assets have been recognized as at December 31, 2012 and 2011.

[d] Under ASC 740, the benefit of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of the benefit of an uncertain tax position may be recognized if the position has less than a 50% likelihood of being sustained.

A reconciliation of the unrecognized tax benefits of uncertain tax positions for the year ended December 31, 2012 is as follows:

As of December 31, 2012, unrecognized benefits of approximately $2.0 million, if recognized, would affect the Company’s effective tax rate, and would reduce the Company’s deferred tax assets. See note 4 for discussion of the Company’s assessment of potential withholdings taxes owed to the ITA resulting from the Collaboration Agreement.

The Company’s accounting policy is to treat interest and penalties relating to unrecognized tax benefits as a component of income taxes. As of December 31, 2012 and December 31, 2011 the Company had no accrued interest and penalties related to income taxes.

The Company is subject to taxes in Canada and the U.S. until the applicable statute of limitations expires. Tax audits by their very nature are often complex and can require several years to complete.