Canadian Mining Taxation

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Bernard Cameron
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1 Canadian Mining Taxation Presentation - March 14, 2012 Index Historical overview Ownership of minerals and interests Mining taxation (federal + provincial) Intangible costs Tangible costs Accelerated depreciation Flow-through shares Successor rules Page 2 1

2 Historical Overview o Taxation in Canada introduced in 1917 for First World War effort o Income Tax Act (the Act ) enacted 1940 o Pre-2003 (25% resource allowance) and Post-2002 (provincial taxes and duties) o Canada s mining tax system is internationally competitive Stability of mineral taxation regime Recognizes cyclical nature of the industry Allows recovery of capital investment before payment of taxes Generally taxes are based on net production profits Taxation changes through transparent consultative process Legislative amendments address trends of the industry Page 3 Ownership of minerals and interests o Ownership by federal government Crown charges on Crown lands, including some seabed and subsoil seaward Northern Canada except for some rights held by Hudson s Bay Company (HBC) o Ownership by the Provinces Ontario, Quebec, Nova Scotia, BC, Alberta, Manitoba and Saskatchewan and New Brunswick retained ownership of Crown lands, including mines and minerals o Freehold ownership of Land HBC Canadian Pacific Railway Homesteaders in Western Canada o Mineral interest is the legal ownership of subsurface minerals which is separate from the surface interest which may be privately or governmentally owned Page 4 2

3 Mining taxation (federal + provincial) o Canadian tax rules to the mining industry based on three (3) levels of taxation: Federal income tax levied on mining operation s taxable income Provincial income taxes on same or similar taxable income Provincial and territorial mining taxes, duties or royalties on production profits o Mining operations segregated in 5 stages (mining taxes apply on first 4 stages) Exploration and development Extraction Processing (concentrating, smelting and refining) up to prime metal stage Reclamation Fabrication or manufacturing (not subject to mining taxation) o Generous tax treatment of exploration costs and other intangible expenses o Generous loss carry-back and carry-forward rules mitigate negative financial effects of fluctuating commodity prices (-3, +20) Page 5 o Since 2007, full deduction of provincial and territorial mining taxes, duties and royalties, for federal and provincial income tax purposes o Pre-production vs. commercial production phase : 90-day period after mill in production consistently at least 60% capacity o These rules apply to most minerals except industrial minerals (limestone, sand and gravel) o Minerals include tar sands Page 6 3

4 o Federal income tax rate on net income from mining operations is: 15% in 2012 and beyond (19.5% in 2008 and consistently reduced since) o Provincial income tax rates on net income from mining operations for 2012 are: 10% in Alberta and New Brunswick 10% in BC (11% on April 1, 20014) 12% in Manitoba 14% in NF and Labrador 16% in Nova Scotia and PEI 11.25% in Ontario (10.5% in 2013 and 10% in 2014) 11.9% in Quebec 12% in Saskatchewan and Nunavut 15% in Yukon 11.5% in NWT Page 7 o Federal Investment Tax Credits (ITC) Non-refundable ITC of 20% of SR&ED qualifying expenditures Refundable ITC of 35% on first $3M of SR&ED expenditures, if CCPC and low taxable income Non-refundable pre-production ITC of 10% of Canadian Exploration Expenses (CEE) for corporations Refundable ITC of 15% of CEE to individuals under flow-through shares regime ITC can be carried-back (-3) and carry-forward (+20) o Provincial Rebates and Tax Credits Alberta refundable tax credit of 10% on first $4M of SR&ED expenditures Saskatchewan royalty tax rebate (when crown charges exceed resource allowance) BC royalty and deemed income rebate Quebec refundable tax credit on SR&ED qualifying expenditures Page 8 4

5 o Provincial and territorial mining taxes and duties vary among provinces and are generally the most important tax burden of a mine operator BC, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, and NF and Labrador (federal for Yukon, Nunavut and NWT) o Mining taxes are generally levied on profits derived from the mining operations o Since no fair market value of production can reasonably be established at the mining stage, starting point of mining tax computation is profits from both mining and processing operations, with the deduction of a processing allowance (PA) removing from taxable profits a given return on the investment made for purchasing processing assets o The PA is computed as a given percentage (representing the allowed rate of return on processing investment) of the original cost of the processing assets Page 9 o All provincial jurisdictions permit a deduction (at varying rates) for depreciation of mining and processing assets and for the amortization of pre-production expenses o Only NF and Labrador and New Brunswick allow deduction of non-crown royalties (because recipient of such royalties is taxed in those provinces) o Alberta has a different mining tax applicable only on gold, but imposes various royalties that vary by specific mineral product o Complex Alberta royalty rules applying to tar sands mining are project-specific o Saskatchewan imposes a series of levies, generally not related to profitability, on potash producers. Uranium producers are subject to a basic royalty of 5% of gross income plus a graduated royalty rate schedule on operating profits o In Quebec, the PA cannot exceed 55% of the combined mining and processing income calculated before the PA; PA is the minimum of 7% of original cost of processing asset and 55% of income before the PA Page 10 5

6 o Mining taxes and duties rates are in 2012: Alberta : 1% tax on mine mouth revenue and 12% tax on net revenue Quebec : 16% duties on mining profits BC : 2% tax on net current proceeds (gross revenue) and 13% tax on net revenue Ontario : 10% tax on taxable profit >$500,000 (except for diamond mining) Manitoba : 10% to 17% tax on operator s profit New Brunswick : 2% royalty on net revenue and 16% tax on net annual profits > $100,000 NF and Labrador : 15% tax on mining taxable income and 20% tax on royalties paid to royalty-holders NWT : lesser of (i)13% tax on value of the output of the mine and additional 5% to 14% rate depending on value of the output Saskatchewan : various rates depending on the minerals Page 11 Intangible costs o Principal business corporation (PBC) is mining or exploring for minerals or processing of ores o Costs incurred for the purpose of determining the existence, location, extent or quality of a mineral resource such as for prospecting, drilling, exploring and clearing are Canadian Exploration Expenditures (CEE) o Costs incurred for bringing a new mine into commercial production are CEE o Sinking, excavating, underground work undertaken after a mine came into production and costs for the acquisition or preservation of mineral rights are Canadian Development Expenditures (CDE) o CEE and CDE exclude depreciable assets (tangible assets) o Deduction of CEE : 100% of cumulative positive balance, no loss can be created by PBC o Deduction of CDE : 30% of cumulative positive balance Page 12 6

7 Intangible costs (Cont d) o Provinces allow tax incentives or recovery of CEE Quebec refundable tax credit from 15% to 38.75% Quebec refundable mining duties credit on losses o Foreign resource expenditures (FRE) Complex rules Pre-2001 : 10% deduction per year Post-2000 : 30% deduction per year but separate pools per country Page 13 Tangible costs o General rule of thumb: expenditures below the surface are intangible assets and above ground are tangible assets o Tangible assets are set in depreciable classes based on the nature of the assets and their use Virtually all mining assets (buildings, machinery, electrical equipment and railways) are Class 41 Acquisitions of assets increase pool of the class, dispositions (lesser of cost or proceeds) reduce the pool of the class Assets must be available for use for CCA to be claimed or after 2 taxation years Capital Cost Allowance (CCA) is discretionary and can only be claimed if pool balance (UCC) is positive If UCC balance is negative, recapture of CCA If UCC balance is positive at year-end and no assets in the class, terminal loss Page 14 7

8 Tangible costs (Cont d) o Prescribed rules set the depreciation rate of classes of assets Assets in Class 41(b) : depreciation of 25% on declining balance basis Assets in Class 41(a) and (a.1) : accelerated CCA Year of acquisition subject to half-year rule o Equipment used in a manufacturing and processing operations i.e. beyond prime metal stage Assets in Class 43 : depreciation of 30% on declining balance basis Year of acquisition subject to half-year rule Page 15 Accelerated depreciation o Accelerated CCA (ACCA) Assets in Class 41(a) and (a.1) : depreciation of 100% of pool balance Class 41(a) assets acquired before commencement of production (new mine) or major expansion MNRC can assess the criteria Class 41(a.1) assets in excess of 5% of gross revenues from the mine for the year CCA claimed cannot exceed income from new mine Separate calculation of ACCA per mine ACCA claimed after normal CCA but before CEE and CDE Page 16 8

9 Flow-through shares o Flow-through share (FTS) is a mechanism that allows a PBC to obtain financing for expenditures on mineral exploration and development in Canada o By issuing FTS, a company can renounce, or flow through, CEE and certain CDE to the purchaser of the share o Expenses renounced are deemed to be incurred by investor and not by corporation and consequently reduce investors income subject to tax o FTS issuing corporations need not be Canadian corporations, but must be Canadian taxpayers that incur resource expenses o A FTS investor is entitled to a 100% write-off for CEE as if he incurred the expense o The so-called "look-back" rule allows CEE renounced to investors to be incurred by the issuer up to a full year (rather than only 60 days) after the end of calendar year in which funds were raised, provided Part XII.6 tax is paid Page 17 Successor rules o Complex rules that allow unclaimed CEE and CDE to be inherited by another corporation (successor) in the context of an acquisition of control o If successor corporation acquired all or substantially all of the transferor s Canadian resource properties and jointly elects with the transferor, successor may claim CEE and CDE deductions from the transferor CEE and CDE pools o Deduction of CEE, CDE and CFR by the successor can only be made against income from mining properties that were owned by the transferor o Anti-avoidance rules exist Page 18 9

10 Questions & Thank You Page 19 10

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