TORSTAR CORPORATION 10. INCOME AND OTHER TAXES (e) No compensation expense has been recognized  for the company’s stock-based compensation plans granted in 2002. Had compensation cost been  determined for these plans based on the fair value method of accounting for stock-based compensation, the company’s 2004 and 2003 net income and earnings per share would have been reduced to the pro forma amounts indicated below: The company has also adopted a DSU for non-employee directors. Each non-employee director receives an award of DSU units as part of his or her annual Board retainer. In addition, a non-employee director holding less than 8,000 Class B non-voting shares, Class A  voting shares, or DSU units, or a combination thereof, receives the cash portion of his or her annual Board retainer in the form of DSU units. Any non-employee director may elect to participate in the DSU in respect of part or all of his or her retainer and attendance fees. The terms of the director DSU are substantially the same as the executive DSU. As at December 31, 2004, 93,942 units were  outstanding at a value of $2.1 million (December 31, 2003 – 27,636 units, value $0.8 million). A reconciliation of income taxes at the average  statutory tax rate to actual income taxes is as follows: Income taxes of $56.8 million were paid during the year (2003 – $48.0 million). The components of the provision for income taxes are  as follows: The fair value of the executive stock options granted in 2002 was estimated to be $4.98 per option at the date of grant using the Black-Scholes option pricing model with the assumptions of a risk free interest rate of 4.7%, expected dividend yield of 2.6%, expected volatility of 24.7% and an expected time until exercise of 5 years. 2004 2003 Net income • as reported $112,703 $123,515 • pro forma $110,305 $121,149 Earnings per share – Basic • as reported $1.42 $1.59 • pro forma $1.39 $1.56 Earnings per share – Diluted • as reported $1.41 $1.57 • pro forma $1.38 $1.54 (f) The company adopted a Deferred Share Unit Plan (“DSU”), for executives and non-employee directors during 2003. An executive may elect to receive certain cash incentive compensation in the form of DSU units. Each unit is equal in value to one Class B non-voting share of the company The units are issued on the basis of the closing market price per share of Torstar Class B non-voting shares on the Toronto Stock Exchange on the date of issue. The units also accrue dividend equivalents payable in additional units in an amount equal to dividends paid on Torstar Class B non-voting shares. DSU units mature upon termination of employment, whereupon an executive is entitled to receive the fair market value of the equivalent number of Class B non-voting shares, net of withholdings, in cash. 2004 2003 Income before taxes $184,307 $202,581 Provision for income taxes  based on Canadian statutory rate of 36.1% (2003 – 36.6%) ($66,600) ($74,200) (Increase) decrease in taxes  resulting from:  Foreign income taxed at  lower rates 2,400 3,350 Foreign losses not tax effected (3,200) (1,760) Manufacturing and processing  profits allowance 1,700 3,410 Large Corporations tax  and other taxes (2,500) (2,950) Future taxes resulting from  changes in statutory tax rates (4,700) Permanent differences (3,900) (2,350) ($72,100) ($79,200) Effective income tax rate 39.1% 39.1% 2004 2003 Current tax provision $62,600 $56,400 Future tax provision  9,500 22,800 Total tax provision $72,100 $79,200 54 TORSTAR 2004