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Income taxes | 9 Months Ended | 12 Months Ended
--- | --- | ---
Sep. 30, 2020 | Sep. 30, 2022
Major components of tax expense (income) [abstract] |  |
Income taxes [Text Block] | 19. Income tax recovery a) Reconciliation of effective income tax rate KWESST's effective income tax rate differs from the statutory rate of 26.5% that would be obtained by applying the combined Canadian basic federal and provincial income tax rate to loss before income taxes. These differences result from the following:
|  | Nine months ended September 30, 2020 |  |  | Twelve months ended December 31, 2019 |
|  | (Adjusted - see Note 8) |  |  | (Restated - see Note 25) |
Loss before income taxes | $ | (3,536,778 | ) |  | (1,147,280 | )
Expected statutory tax rate |  | 26.5% |  |  | 26.5% |
Expected tax recovery resulting from loss |  | (937,246 | ) |  | (304,029 | )
Increase (reduction) in income taxes resulting from: |  |  |  |  |  |
Non-deductible expenses |  | 275,273 |  |  | 28,115 |
Unrecognized temporary differences |  | 661,973 |  |  | 275,914 |
| $ | - |  | $ | - |
KWESST claims research and development deductions and related Investment Tax Credits ("ITC") for tax purposes based on management's interpretation of the applicable legislation in the Income Tax Act of Canada. These claims are subject to audit by the Canada Revenue Agency ("CRA") and any adjustments that results could affect ITCs recorded in the consolidated financial statements. During the nine months ended September 30, 2020, KWESST recognized estimated investment tax credits of $127,325 for the current period and the twelve months ended December 31, 2019. This was presented as a reduction to R&D consulting and material costs in the consolidated statements of net loss and comprehensive loss. b) Deferred tax balances The following tables deferred tax assets (liabilities) have been recognized in the consolidated financial statements:
|  | Balance at December 31, 2019 |  |  | Recognized in profit or loss |  |  | Recognized in equity |  |  | Balance at September 30, 2020 |
Deferred tax assets (liabilities): |  |  |  |  |  |  |  |  |  |  |  |
Net operating loss carryforwards | $ | - |  | $ | 48,045 |  | $ | - |  | $ | 48,045 |
Intangible assets |  | - |  |  | (48,045 | ) |  |  |  |  | (48,045 | )
| $ | - |  | $ | - |  | $ | - |  | $ | - |
c) Unrecognized net deferred tax assets Deferred taxes reflect the impact of loss carryforwards and of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by enacted tax laws. However, KWESST has not recorded net deferred tax assets at September 30, 2020 and December 31, 2019, due to the uncertainty involved in determining whether these deferred tax assets will be realized upon expiration due to KWESST's limited history and operating losses since its inception. The following is a summary of KWESST's unrecognized deductible temporary differences:
|  | Balance at |  |  | Balance at |
|  | September 30, |  |  | December 31, |
|  | 2020 |  |  | 2019 |
Net operating loss carryforwards | $ | 4,279,494 |  | $ | 2,111,531 |
Share issuance costs |  | 1,496,239 |  |  | 17,281 |
Scientific research and development expenditures |  | 218,235 |  |  | 170,940 |
Other |  | 46,891 |  |  | 22,106 |
| $ | 6,040,859 |  | $ | 2,321,858 |
d) Available net operating losses At September 30, 2020, KWESST has the following net operating losses in Canada available to reduce future year's taxable income which expire as follows:
Year of expiry |  | Amount |
2036 | $ | 512,163 |
2037 |  | 611,677 |
2038 |  | 1,174,797 |
2039 |  | 1,829,518 |
2040 |  | 332,641 |
| $ | 4,460,796 |
| 21. Income taxes a) Income tax recovery Income tax recovery is made up of the following components:
|  |  |  |  |  |  |  | Nine months |
|  | Year end ended |  |  | Year ended |  |  | ended |
|  | September 30, |  |  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
Current income tax recovery (expense): | $ | - |  | $ | - |  | $ | - |
Deferred income tax (recovery) expense: |  | (49,442 | ) |  | - |  |  | - |
| $ | (49,442 | ) | $ | - |  | $ | - |
b) Reconciliation of effective income tax rate Our effective income tax rate differs from the statutory rate of 26.5% that would be obtained by applying the combined Canadian basic federal and provincial income tax rate to loss before income taxes. These differences result from the following:
|  |  |  |  |  |  |  | Nine months |
|  | Year ended |  |  | Year ended |  |  | ended |
|  | September 30, |  |  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
Loss before income taxes | $ | (10,569,732 | ) | $ | (9,315,372 | ) | $ | (3,536,778 | )
Expected statutory tax rate |  | 26.5% |  |  | 26.5% |  |  | 26.5% |
Expected tax recovery resulting from loss |  | (2,800,979 | ) |  | (2,468,574 | ) |  | (937,246 | )
Increase (reduction) in income taxes resulting from: |  |  |  |  |  |  |  |  |
Non-deductible expenses |  | 563,842 |  |  | 654,956 |  |  | 275,273 |
Foreign operations subject to different tax rates |  | 5,329 |  |  | 3,593 |  |  | - |
Unrecognized temporary differences |  | 2,182,366 |  |  | 1,826,279 |  |  | 661,973 |
Prior year differences |  | - |  |  | (16,254 | ) |  | - |
| $ | (49,442 | ) | $ | - |  | $ | - |
KWESST claims research and development deductions and related Investment Tax Credits ("ITC") for tax purposes based on management's interpretation of the applicable legislation in the Income Tax Act of Canada. These claims are subject to audit by the Canada Revenue Agency ("CRA") and any adjustments that results could affect ITCs recorded in the consolidated financial statements. The following table shows the breakdown of R&D expenses, net of ITCs:
|  | Year ended |  |  | Year ended |  |  | Year ended |
|  | September 30, |  |  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
R&D expenses | $ | 2,064,493 |  | $ | 2,369,145 |  | $ | 944,909 |
Less: |  |  |  |  |  |  |  |  |
Investment tax credits |  | - |  |  | (231,007 | ) |  | (127,325 | )
R&D expenses, net |  | 2,064,493 |  |  | 2,138,138 |  |  | 817,584 |
c) Deferred tax balances The following tables deferred tax assets (liabilities) have been recognized in the consolidated financial statements:
|  | Balance at |  |  | Arising on a |  |  |  |  |  | Balance at |
|  | September 30, |  |  | business |  |  | Recognized in |  |  | September 30, |
|  | 2021 |  |  | combination |  |  | profit or loss |  |  | 2022 |
Deferred tax assets (liabilities): |  |  |  |  |  |  |  |  |  |  |  |
Net operating loss carryforwards |  | - |  |  | - |  |  | 26,459 |  |  | 26,459 |
Intangibles and development costs |  | - |  |  | (49,442 | ) |  | 22,983 |  |  | (26,459 | )
|  | - |  |  | (49,442 | ) |  | 49,442 |  |  | - |
|  | Balance at |  |  |  |  |  |  |  |  | Balance at |
|  | September 30, |  |  | Recognized in |  |  | Recognized in |  |  | September 30, |
|  | 2020 |  |  | profit or loss |  |  | Equity |  |  | 2021 |
Deferred tax assets (liabilities): |  |  |  |  |  |  |  |  |  |  |  |
Net operating loss carryforwards |  | 48,045 |  |  | (48,045 | ) |  | - |  |  | - |
Impairment provision |  | (48,045 | ) |  | 48,045 |  |  | - |  |  | - |
|  | - |  |  | - |  |  | - |  |  | - |
|  | Balance at |  |  |  |  |  |  |  |  | Balance at |
|  | December 31, |  |  | Recognized in |  |  | Recognized in |  |  | September 30, |
|  | 2019 |  |  | profit or loss |  |  | Equity |  |  | 2020 |
Deferred tax assets (liabilities): |  |  |  |  |  |  |  |  |  |  |  |
Net operating loss carryforwards |  | - |  |  | 48,045 |  |  | - |  |  | 48,045 |
Impairment provision |  | - |  |  | (48,045 | ) |  | - |  |  | (48,045 | )
|  | - |  |  | - |  |  | - |  |  | - |
d) Unrecognized net deferred tax assets Deferred taxes reflect the impact of loss carryforwards and of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by enacted tax laws. However, KWESST has not recorded net deferred tax assets at September 30, 2022 and 2021 on the following deductible temporary differences, due to the uncertainty involved in determining whether these deferred tax assets will be realized upon expiration due to KWESST's limited history and cumulative operating losses since its inception. The following is a summary of KWESST's unrecognized deductible temporary differences:
|  | Balance at |  |  | Balance at |  |  | Balance at |
|  | September 30, |  |  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
Net operating loss carryforwards |  | 18,589,894 |  |  | 9,429,436 |  |  | 4,279,494 |
Share issuance costs |  | 1,298,783 |  |  | 1,810,927 |  |  | 1,496,239 |
Intangibles and development costs |  | 608,705 |  |  | 780,607 |  |  | - |
Scientific research and development expenditures |  | 1,583,058 |  |  | 1,789,571 |  |  | 218,235 |
Other |  | 46,300 |  |  | 104,793 |  |  | 46,891 |
|  | 22,126,741 |  |  | 13,915,334 |  |  | 6,040,859 |
e) Available net operating losses At September 30, 2022, KWESST has the following net operating losses in Canada available to reduce future year's taxable income which expire as follows:
Year of Expiry |  | Amount |
2036 | $ | 512,163 |
2037 |  | 744,022 |
2038 |  | 1,174,797 |
2039 |  | 1,732,039 |
2040 and thereafter |  | 14,526,720 |
| $ | 18,689,741 |
f) Available research and development investment tax credits The Company has the following research and development investment tax credits available to reduce future years' income taxes payable which expire as follows:
Year of Expiry |  | Amount |
2037 | $ | 13,361 |
2038 |  | 6,742 |
2039 |  | - |
2040 and thereafter |  | 328,480 |
| $ | 348,583 |

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