2012 Americas School of Mines

Transcription

1 Americas School of Mines Basics of Mining Taxation - Basics of Mining Taxation - Canada

2 Section one Opening remarks 2

3 Section two Introduction of Presenters and Overview of the Agenda 3

4 Agenda Section one Section two Section three Section four Section five Section six Opening remarks Introduction of Presenters and Overview of the Agenda Canadian Exploration Expense ( CEE ) Canadian Development Expenses ( CDE ) Foreign Resource Expenses ( FRE ) ITC and Successor Corporation Rules 4

5 Agenda BREAK Section seven Flow-thru Shares Section eight Cumulative Capital Allowance Class 41 Assets ( CCA ) Section nine Foreign Affiliates Canadian Tax Considerations Section ten Reclamation Section eleven Provincial mining tax Q & A 5

6 Section three Canadian Exploration Expense ( CEE ) 6

7 Canadian Exploration Expense ( CEE ) CEE is defined in subsection 66.1(6) For mining, the relevant paragraphs are (f) and (g) In general terms, CEE consists of virtually all Canadian exploration expenses including those incurred (from 66.1(6)(f)) - To determine the existence, location, extent or quality of a mineral resource in Canada, including prospecting, rotary, diamond, percussion or other drilling, geological, geophysical or geochemical surveys, and trenching, test pits, and preliminary sampling; or pre-production 7

8 CEE cont d (paragraph (f)) But not including: - (v) any Canadian development expense, or - (vi) any expense that may be reasonably be considered to be related to a mine that has come into production in reasonable commercial quantities or to be related to a potential or actual extension thereof, 8

9 CEE cont d (paragraph (g)) Before the start of production, to bring a new mine in Canada into commercial production, including the expense of clearing, removing overburden and stripping, sinking a mine shaft, and constructing an adit or other underground entry, 9

10 CEE Does not include CEE does not include: - The capital cost of any depreciable property of a prescribed class - Expenses in subparagraph (f)(i), (f)(iii), (f)(iv) or (g) that results in revenue 10

11 CEE Difficulties encountered Differentiation between a new mine and an existing mine - Case law principles of determining new mine status Commercial production - A mine comes into production in reasonable commercial quantities on the first day of the three month period during which the mill operates at 60% of rated capacity 11

12 CEE Difficulties encountered (cont d) Environmental Studies Feasibility Studies Period between exploration phase and decision to develop a mine - Canada Revenue Agency (CRA) views 12

13 Tax Treatment CEE is accumulated in the CEE pool which is recorded on Schedule 12 The pool has an indefinite carry-forward The full amount of the Cumulative CEE pool can be deducted in the year to the extent of the company s income from any source (principal business corporation) this deduction is optional CEE can be claimed to create losses if not a principal business corporation 13

14 Section four Canadian Development Expenses ( CDE ) 14

15 Canadian Development Expenses ( CDE ) CDE is defined in subsection 66.2(5) The definition contemplates oil and gas as well as mining. For mining, the relevant paragraphs are (c), (d), (e) and (f) In general terms, CDE includes: - The acquisition costs of Canadian resource properties; and - The cost of mine shafts and main haulage ways or similar underground work incurred after coming into commercial production 15

16 Tax Treatment CDE is accumulated in Cumulative Canadian Development Expenditure ( CCDE ) pool which is recorded on Schedule 12. This pool has an indefinite carryforward period. The taxpayer can deduct up to 30% of the CCDE pool at the end of each year (but is restricted if it is a short year). This deduction is optional. CDE can be claimed whether or not the corporation has income; that is, by claiming CDE, the taxpayer can create a loss, eligible for carryback or carryforward. Generally, when a taxpayer disposes of a Canadian resource property, the proceeds of disposition are applied to reduce the taxpayer s CCDE pool. If the taxpayer s CCDE pool becomes negative, that amount is included in income. 16

17 Farm-In Arrangement In some circumstances, a taxpayer (transferor) can transfer its ownership interest in a resource property to another party (transferee) without realizing proceeds of disposition, and without the transferee incurring a cost regarded as a cost of acquiring a resource property. No specific rules; however, there is a CRA administrative policy. Property must be an unproven resource property, if not acquisition/disposition will occur. 17

18 Canadian Exploration and Development Overhead Expenses ( CEDOE ) CEDOE is a subset of CEE and CDE CEDOE is defined in Regulation 1206 In general terms CEDOE includes any CEE or CDE in respect of: - Administration, management or financing; - Salaries, wages or related benefits paid in respect of an employee whose duties were not all or substantially all directed towards exploration or development; - Maintenance, taxes, insurance or rent for property that is not used substantially all for the purpose of exploration or development; or - The profit component of certain payments made to a person who is connected with the taxpayer (generally a person holding 10% interest or more in the taxpayer). 18

19 Section five Foreign Resource Expenses ( FRE ) 19

20 Foreign Resource Expenses ( FRE ) FRE is defined in subsection 66.21(1). FRE is in effect for taxation years beginning after Prior to this time the expenses were referred to as Foreign Exploration and Development Expenditures ( FEDE ). In general terms, FRE consists of expenses incurred in acquiring, exploring and developing a foreign resource property owned, or to be owned, by a Canadian resident. FRE has a separate pool for each country; whereas, FEDE expenses were all pooled together (with no country segregation). 20

21 Tax Treatment FRE is accumulated in Cumulative Foreign Resource Expenditure ( CFRE ) pool which is recorded on Schedule 12. Taxpayer can deduct the lesser of its foreign resource income from a specific country and 30% of the CFRE pool in respect of that country. The taxpayer is also allowed to claim in aggregate the lesser of 30% of the CFRE pool for all countries and its foreign resource income from all countries. In any event, the taxpayer can claim up to 10% of its total CFRE regardless of the amount of foreign resource income, and thus offset income from other sources. These deductions are optional. If the taxpayer s CFRE pool becomes negative, that amount is included in income. 21

22 Section six ITC and Successor Corporation Rules 22

23 Successor Corporation Rules Purpose of Successor Rules section 66.7 Prevent loss trading like 111(4) rules Special rule allowing transfer of properties along with related resource expenditures Result is that you can only use restricted pools against properties against which the pools are streamed 23

24 Successor Corporation Rules What causes resource pools to be successored? Acquisition of Control ss. 111(5) - Original owner deemed to be successor owner of property related to the pools due to an acquisition of control Transfer of Pools ss. 66.7(7) or (8) - Purchaser of a Canadian resource property makes joint successor election with prior owner of property 24

25 Successor Corporation Rules Example: Acquisition of Control Part A - TargetCo has 2 resource properties (Prop A & B) & CCEE pool of $10 million - AcquisitionCo has 1 resource property (Prop C) which is operating & profitable; AcquisitionCo has no tax pools - AcquisitionCo purchases TargetCo for $10 million & winds-up TargetCo Result: - On wind-up AcquisitionCo inherits $10 million CCEE pool which is restricted by AOC of TargetCo & can only be claimed against income from Prop A&B (i.e., TargetCo former properties) 25

26 Successor Corporation Rules Example: Acquisition of Control Part B - Same example except prior to wind-up, TargetCo transfers Prop A & B to AcquisitionCo for $10 million Result: - AcquisitionCo has a unrestricted CCDE pool of $10 million that can be used against income from Prop A, B or C - You can unsuccessor pools if you have a property with value 26

27 Successor Corporation Rules Example: Transfer of All or substantially all of CRP - VendorCo has 4 resource properties (Prop A,B,C & D) - VendorCo has Canadian resource pools of $20 million - AcquisitionCo has 1 resource property (Prop E) which is operating and profitable; AcquisitionCo has no tax pools - AcquisitionCo purchases Prop A,B, & C for $10 million - VendorCo & AcquisitionCo. make joint successor election pursuant to 66.7(7) or (8) Result: - Acquisition Co. gets unrestricted CCDE pool of $10 million for purchase of Prop A,B, & C; joint successor election provides it with undeducted resource pools of VendorCo. of $10 million 27

28 Successor Corporation Rules Issues: Transfer of All or substantially all of CRP Example assumes that Prop A,B & C comprised all or substantially all of VendorCo Canadian Resource Properties - Property D retained by VendorCo How do you measure all or substantially all? - Value? Dollars spent? Quantity? 28

29 Successor Corporation Rules Concluding thoughts: Successored pools can be transferred can have an unlimited number of predecessor owners Tracking of properties on hand is key Very complicated section of the Act language is hard to follow Form T2010 for transfers of property / resource pools AOC triggers automatic successoring of pools Successor pools can be unrestricted to extent properties have value 29

30 Corporation Mineral Tax Credit for Pre-Production Mining Expenditure To provide a tax incentive to taxable Canadian corporations incurring pre-production mining expenditure that is not funded by flowthrough shares It is only available to taxable Canadian corporations The corporation must incur pre-production mining expenditure Tax credit must be claimed within one year after the filing due date for the particular year 30

31 Corporation Mineral Tax Credit for Pre-Production Mining Expenditure Eligible Expenditure Pre-production Mining Expenditure includes Grassroots CEE and Pre-production Development Costs per paragraph 66.1(6)(f) and (g) 31

32 Corporation Mineral Tax Credit for Pre-Production Mining Expenditure Eligible Expenditure (cont d) S. 66.1(6)(f) - Expenses incurred for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada, including any expense incurred in the course of: - Prospecting - Carrying out geological, geophysical or geochemical surveys - Drilling by rotary, diamond, percussion or other methods, or - Trenching, digging test pits and preliminary sampling But not including: - Any Canadian development expense - Any expense relating to a mine that has come into production 32

33 Corporation Mineral Tax Credit for Pre-Production Mining Expenditure Eligible Expenditure (cont d) S.66.1(6)(g) - Any expense incurred after Nov 16, For the purpose of bringing a new mine in a mineral resource in Canada into production - Incurred before the new mine comes into production - Includes expenses for clearing, removing overburden, stripping, sinking a mine shaft or constructing an adit or other underground entry 33

34 Corporation Mineral Tax Credit for Pre-Production Mining Expenditure Eligible Expenditure (cont d) Minerals eligible for this ITC are included in the definition of Preproduction Mining Expenditure in subsection 127(9) A mineral deposit from which the principal mineral to be extracted is diamond, a base or precious metal deposit 34

35 Corporation Mineral Tax Credit for Pre-Production Mining Expenditure Non-refundable tax credit, phase out per 2012 Federal Budget For mining exploration expenses incurred in: % % and onward nil For development expenses incurred: - Before % % and onward nil 35

36 Corporation Mineral Tax Credit for Pre-Production Mining Expenditure Additional transitional relief will apply at a 10% rate for preproduction development expenses incurred before 2016 in certain cases where a written agreement was entered into before March 29, 2012 T2 schedule 31 (Part 16) 3 year carry back, or 20 year carry forward Tax credit must be deducted from the CEE pool 36

37 Section seven Flow-through Shares 37

38 Flow-Through Shares: The Basic Components Basic assumption: the tax deductions attributable to exploration and development expenditures are more valuable to the FTS holders than the corporation actually incurring such expenditures. Basic components: - A subscriber and a principal-business corporation (or PBC) enter into a contractual agreement (the subscription agreement ) for the issuance of FTS - PBC covenants to incur and renounce Qualifying Expenditures in an amount equal to the gross subscription proceeds - Subscriber advances the FTS consideration, the PBC issues the FTS and the PBC incurs the Qualifying Expenditures - The Qualifying Expenditures are renounced (or passed on) from the PBC to the FTS holder; the FTS holder is then generally entitled to deduct the Qualifying Expenditures 38

39 The Fundamentals Only a PBC can issue a FTS (more on this later). Only the initial subscriber of FTS is entitled to the renunciation of Qualifying Expenditures. - If a subscriber purchases FTS from a public corporation and immediately sells such shares in the market (e.g., a bought deal), the subsequent buyer is not entitled to any renunciation. - The initial subscriber is still entitled to receive the renunciation of Qualifying Expenditures even if the FTS are owned for a brief period of time - Even if the initial subscriber does not own the FTS on the date the Qualifying Expenditures are incurred or renounced. 39

40 The Fundamentals (cont d) Only Qualifying Expenditures incurred after the subscription agreement is executed may be renounced to a FTS holder - Exception: look back rule (more on this later) Any share issuance costs and general and administrative costs, etc., must be financed from sources other than the issuance of FTS A FTS includes a right to acquire a FTS, which has generally been accepted as allowing a special warrant to qualify as a FTS There are no tracing rules applicable to the issuance of FTS which would require that a PBC be able to trace the subscription proceeds to the actual payment of Qualifying Expenditures From a corporate law perspective, there is nothing unique about the issuance of a FTS: they are usually typical common shares 40

41 FTS Holder: Limits on the Deduction? For residents of Canada: - FTS holder can claim Qualifying Expenditures in excess of income and create a non-capital loss. - The non-capital loss can be carried forward for 20 taxation years or back 3 taxation years and be deducted against income from all sources in those years. For non-residents of Canada: - Non-resident may only deduct Qualifying Expenditures to the extent that the non-resident has taxable income in Canada. FTS is deemed to have been acquired at a cost of nil. May 3,

42 Qualifying Corporations Flow-through issuing corporation must be a Principal Business Corporation or PBC. As it relates to mining companies, a PBC is generally one whose principal business is any of, or a combination of, the following: - Mining or exploring for minerals. - Processing or marketing of metals or minerals that were recovered from mineral ores. - A corporation substantially all of the assets of which are shares of the capital stock or indebtedness of one or more PBCs and that are related to the corporation. 42

43 What are Qualifying Expenditures? Importance: if expenses incurred by the PBC are not Qualifying Expenditures, the renunciation of the expenses is not valid. Result: the FTS holder does not obtain a deduction for the expenses renounced, or associated tax credits: - Could give rise to a liability for loss of promised tax benefits. Self-assessment system: it is the obligation of the PBC to evaluate whether an expense qualifies: - CRA views the pool of Qualifying Expenditures narrowly! 43

44 Qualifying Expenditures: Bucket #1 Test: expense incurred for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada. Examples of expenses that qualify: - Prospecting - Diamond, percussion or other drilling - Geological, geophysical or geochemical surveys - Trenching, test pits and preliminary sampling 44

45 Qualifying Expenditures: Bucket #2 Test: any expense incurred by the taxpayer for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities and incurred before the new mine comes into production in such quantities. Examples of expenses that qualify: - Clearing and removing overburden - Stripping - Sinking a mine shaft - Constructing an adit or other underground entry 45

46 What is NOT a Qualifying Expenditure? Overhead expenses: - Administration, management, or financing expenses - Salary & wages of employee whose duties are not 90% or more for exploration and development - Maintenance or rental of property that is not used 90% or more for exploration and development Acquisition cost of a mineral property Acquisition cost of depreciable property 46

47 General Expense Classifications In: - Drilling, metallurgical testing and associated costs incurred to confirm reserves included in a National Instrument Rule compliant report qualify. Out: - Costs incurred that would be included in the capital cost of depreciable property (such as a road/drilling equipment/construction of housing facilities). - Overhead expenditures. - Scoping study costs that relate to the assessment of mine development options and/or profitability of developing the deposit into a mine. - Consultation costs to assess community attitudes/community information program undertaken prior to a decision to explore. 47

48 Environment Studies In: - Environmental assessments undertaken by a taxpayer to meet a legal or informal obligation under the terms of a permit. - Environmental assessments such as sampling and monitoring in relation to an exploration activity. Out: - Environmental assessments to meet a legal or informal requirement to obtain a permit. - General baseline environmental assessments undertaken prior to carrying out a specific exploration activity. 48

49 Feasibility Studies In: - Planning for, and studies relating to, the conduct of an exploration activity. - Physical and chemical assessments related to a deposit, with the objective of informing a decision whether to undertake more advanced exploration at site. - Assessing of the physical and chemical characteristics of the deposit to assess its potential as a commercial deposit. Out: - Preliminary planning for a potential exploration activity undertaken prior to a decision to explore. - Assessment of mine development options and profitability of developing the deposit into a mine. 49

50 Key Terms Form T101A - Required to be completed to renounce Qualifying Expenditures Date of renunciation: usually the earlier of: - Signing date of the T101A; and - Date the earliest T101, Statement of Resource Expense, was delivered to an investor Effective date of renunciation: - Date renounced expenses are deemed to have been incurred by the FTS holder 50

51 Renunciation The General Rule Only Qualifying Expenditures (Buckets 1 & 2) incurred after the subscription agreement is executed may be renounced to a FTS holder. PBC must incur Qualifying Expenditures during the following period: - Begins on the date the subscription agreement is signed. - Ends 24 months after the end of the month the subscription agreement is signed. Date of renunciation: by end of February of the year following the end of the 24 month period. T101A filing deadline: month following the date of renunciation. Effective date of renunciation: may choose any date from date expenses incurred to date of renunciation. 51

52 General rule Timeline J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A Assume FTS agreement entered into on November 1, 2012 Period during which corporation must incur eligible resource expense Latest date to renounce expenditures that were incurred in the 24 months following the agreement - before march 2015 Latest date to file a renunciation made in Febraury,

53 Renunciation The Look-Back Rule Qualifying expenditures: Bucket #1 only! The basic mechanics: - PBC enters into a subscription agreement and receives the subscription proceeds in money in the current calendar year (Year 1); - Subscription agreement: PBC covenants to incur certain Qualifying Expenditures before the end of the next calendar year (Year 2); - PBC and the subscriber deal at arm's length throughout Year 2; - PBC makes the renunciation of Qualifying Expenditures to the subscriber on or before March 31st of Year 2; - Renunciation is effective, for income tax purposes, on December 31 of Year 1. 53

54 Look-back rule Timeline J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A Assume FTS agreement entered into on November 1, 2012 Effective date of renunciation - December 31, 2012 Period during which corporation must incur eligible resource expense Renunciation period - January, February or March of 2013 Latest date to file a renunciation made in March, 2013 Latest date to file Part XII.6 tax without being subject to penalties - by the end of February

55 Part XII.6 tax Policy objective: given the look-back rule allows the FTS holder to deduct an expense in the year prior to it being incurred by the PBC, the CRA wants to be compensated for the accelerated deduction. A tax payable on renounced expenditure remaining unspent after February in Year 2. Calculated on monthly basis using prescribed interest rates: apply rate to the amount unspent at month-end. May 3,

56 Back-to-Back Arrangements Typical Scenario: Holdco has agreed to issue FTS using the Look-Back Rule and purports to renounce such expenditures to its FTS holders with an effective date for income tax purposes of December 31, Explorco incurs the Qualifying Expenditures in 2012: Look-Back Rule cannot be used between the parent and subsidiary because they are related. Explorco renounces the Qualifying Expenditures to Holdco in 2012; Holdco renounces to FTS holders prior to March 31, 2012 with an effective date, for income tax purposes, of December 31, Investors FTS Holdco Explorco Property FTS 56

57 Back-to-Back Arrangements Important conditions: Holdco and Explorco are related at the time Explorco renounces Qualifying Expenditures to Holdco. The effective date of the renunciation by Explorco is in The Qualifying Expenditures are incurred prior to being renounced. The Qualifying Expenditures renounced by the Explorco to Holdco are Bucket 1 expenses. Investors FTS Holdco Explorco Property FTS 57

58 Common Mistakes Back-to-back arrangements: failing to have Explorco issue FTS to Holdco: - Rectification may be possible. Not spending FTS commitment on-time: - Given money raised is not traced, other sources of funds can help back-fill the short-fall. 58

59 Non-Flow Through Warrants Warrants are often included as sweeteners to subscribers in flowthrough offerings: - The warrants can be either issued as flow-through or non-flowthrough. - If non-flow-through warrants, the subscription price allocated to the warrants cannot be renounced to flow-through shareholders. 59

60 Non-Flow Through Warrants Example: - PBC issues $100 unit comprising of a flow-through share and a non-flow-through warrant. - No explicit allocation of the subscription proceeds is made between a flow-through share and non-flow-through warrant. - PBC often assumes that you can renounce $100 to the flowthrough share and that a nil value is implied for the non-flowthrough warrant. Issue: - CRA could, with 20/20 hindsight, attribute some value to the warrants and reduce the flow-through renunciations accordingly. 60

61 New Mine Status Qualifying expenses must be in respect of a new mine OR incurred before mine comes into commercial production. Some considerations: - Period of time since mine was last in operation? - Has method of mining changed? Whether the mineral deposit to be exploited is separate from that of any other mine? Whether the workings will be independent of or unconnected to any of the other mines in the vicinity? whether the machinery and equipment of the new working will be acquired specifically for the new mine and will not be shared with any other mine? 61

62 Section eight Cumulative Capital Allowance - Class 41 Assets ( CCA ) 62

63 Canadian Mining Taxation Capital Cost Allowance Overview Tax deductions for the cost of fixed assets Pool concept Excludes expense included to CEE and CDE 63

64 Class 41 Assets Only a few UCC classes specific to the mining industry Tangible assets used in a mining operation: building, equipment, machinery for processing ore (may include assets not owned by mining company) General rate is 25%, in some cases, accelerated depreciation is available on some asset additions Subject to general ½ year-rule and available for use rules Separate class needed for each individual mine 64

65 Class 41 Assets Subclasses Class 41(a) Available to allow mining companies to recover large start-up costs Buildings and equipment acquired before the commencement of commercial production of a mine or major expansion of a mine (defined as where there is a 25% increase in mine capacity) Accelerated depreciation available of up to 100% 65

66 Class 41 Assets Subclasses Class 41(a.1) Expenditures incurred after March 6, 1996 and are in excess of 5% of the gross income from a mine Class 41(a.1) accelerated claims must be claimed before Class 41(a) accelerated claims can be used Accelerated claims are limited to the income from the mine 66

67 Class 41 Assets Subclasses Class 41(a.2) Relates to expenditures for oil sand mine projects Class 41(b) Generally relates to mining buildings and equipment acquired after the commencement of commercial production Expenditures do not qualify for accelerated depreciation and therefore are depreciated at 25% 67

68 Roads, Townsite Costs and Related Intangibles For costs incurred for public roads, townsites, or related intangibles such as access rights, the taxpayer does not end up with ownership of the assets and so has no property to depreciate For property acquired after March 6, 1996, these expenditures are classified as depreciable property unless expensed as temporary access roads to oil and gas wells 68

69 Section nine Foreign Affiliates Canadian Tax Considerations 69

70 Foreign Affiliate Issues An Overview Definition of foreign affiliate and controlled foreign affiliate Section 17 Foreign accrual property income (FAPI) Repatriations surplus accounts Capital dispositions by foreign affiliates Corporate residency 2011 proposed amendments 70

71 Definitions Subsection 95(1) Foreign affiliate: Corporation not resident in Canada Equity percentage ownership not less than 1% Total equity percentage with related parties of not less than 10% 71

72 Definitions Subsection 95(1) Controlled foreign affiliate: A foreign affiliate controlled by the taxpayer, or would be controlled by the taxpayer if the taxpayer owned all of the shares owned by: - the taxpayer - persons NAL to the taxpayer - four or less Canadian resident shareholders other than the taxpayer or those NAL to the taxpayer - persons who are NAL to the group of four or less Canadian resident shareholders 72

73 Section 17 Overview Provision designed to prevent Canadian corporations from employing capital outside of Canada by way of non- or low interest bearing loans, thereby avoiding Canadian tax on the income derived from that capital Deemed interest income Exception for loans to controlled foreign affiliates used in active business Other exceptions 73

74 Subsection 17(1) Deemed interest benefit if: - Amount owing by a non-resident person to a Canadian corporation - Remains outstanding for more than one year - No reasonable rate of interest Interest is computed at the prescribed rate of interest Deductions may be granted in respect of interest actually received 74

75 Exceptions to subsection 17(1) Subsection 17(8) Loan to a controlled foreign affiliate Used by the CFA to gain or produce income from an active business Or to make a loan to another CFAs and the interest income on the loan is not FAPI 75

76 Exceptions to subsection 17(1) Subsection 17(7) Where Part XIII tax is paid (non-resident withholding tax) Subsection 17(9) Transactions between unrelated parties on sales of goods and services (trade receivables) Also anti-avoidance provisions to watch out for 76

77 Section 17 What to look for Consolidated trial balance Non-consolidated trial balance of Canadian corporation Are there advances to or amounts owing from foreign entities? What are the funds being used for? Is interest being charged on these loans and advances? 77

78 FAPI An Overview Foreign accrual property income ( FAPI ) rules Anti-deferral provisions that subject Canadian taxpayers to current tax on FAPI earned by a controlled foreign affiliate Regardless of whether the income is repatriated to Canada An offsetting deduction is granted that is an effective tax credit for any foreign taxes paid on the FAPI 78

79 Definition of FAPI Subsection 95(1) An aggregate of: - Income from property - Income from business other than an active business - Taxable capital gains (other than on dispositions of excluded property) 79

80 FAPI Foreign accrual tax deduction Subsection 91(1) Include FAPI in income Subsection 91(4) Deduction available equal to the foreign accrual tax multiplied by the relevant tax factor 80

81 FAPI Definition of active business income Subsection 95(1) Income from any business other than: - an investment business - a business deemed to be a business other than an active business Income that pertains to or is incident to active business Income deemed to be active business income by virtue of paragraph 95(2)(a) 81

82 FAPI Subsection 95(2)(a) Exception Deems income from property to be active business income If the income is reasonably considered directly related to the active business of a related non-resident and would be included in active business income of the other corporation if earned by it Only applies if the Canadian corporation has a qualifying interest in the CFA 10% or more of votes and value throughout the year 82

83 FAPI What to look for Consolidated trial balance Is there investment income earned by a controlled foreign affiliate? Interest income, dividends Are there any unusual transactions? Dispositions, reorganizations, repatriations Is there any other non-active business income? Royalties, derivatives transactions 83

84 Repatriations An Overview Rules regarding repatriations are designed to provide relief from double taxation Relevant to corporate shareholders receiving dividends from foreign affiliates Two basic surplus accounts Exempt surplus Taxable surplus Tax treatment differs between the two 84

85 Repatriations Exempt Surplus Paragraph 113(1)(a) Dividends from exempt surplus are entirely exempt from Canadian tax Regulation 5907 Exempt surplus includes: - Active business income that is earned by a foreign affiliate that is resident in, and carrying on business in, a designated treaty country - Non-taxable portion of capital gains - Some taxable capital gains - Exempt surplus dividends received from another foreign affiliate 85

86 Repatriations Taxable surplus Paragraphs 113(1)(b) and (c) Dividends from taxable surplus are taxable and are subject to an effective tax credit for any foreign tax paid Regulation 5907 Taxable surplus consists of: - Active business income earned by a foreign affiliate that is resident in, and carrying on business in, a country other than a designated treaty country - Some taxable capital gains - Taxable surplus dividends received from another foreign affiliate - Income that has been taxed as FAPI 86

87 Repatriations What to look for Consolidated trial balance Non consolidated trial balance of Canadian corporation Have there been any repatriations of funds up to the Canadian level? 87

88 Capital dispositions by FAs An Overview Capital gains and losses incurred by foreign affiliates Whether or not the asset that is disposed of is excluded property determines whether the gain is: - FAPI - Exempt surplus - Taxable surplus 88

89 Definition of excluded property Subsection 95(1) Property held by the foreign affiliate for the purpose of earning income from active business carried on by the foreign affiliate Shares of another foreign affiliate where all or substantially all of the fair market value of the other foreign affiliate s property is attributable to excluded property Debt receivable from another foreign affiliate if actual or deemed interest on the debt is active business by virtue of paragraph 95(2)(a) 89

90 Capital dispositions surplus accounts Exempt surplus includes: Non taxable portion of capital gains Taxable portion of capital gains on disposition of excluded property that is an active business asset in a designated treaty country Taxable surplus includes: Taxable portion of capital gains on disposition of excluded property that is an active business asset in a non-designated treaty country Taxable portion of capital gains on dispositions of excluded property that are not active business assets (e.g.: shares, partnership interests) Taxable portion of gains taxed as FAPI 90

91 Capital dispositions What to look for Consolidated trial balance Notes to the consolidated financial statements Were there any significant capital transactions during the year by any foreign affiliates? What was the nature of the asset and its use? Were they in a designated treaty country? 91

92 Corporate residency An Overview Subsection 2(1) Canadian resident corporations pay Canadian tax on their worldwide income Subsection 2(3) Non-resident corporations are taxed only on their Canadian sourced income Is what seems to be a foreign affiliate actually a Canadian corporation? 92

93 Corporate residency statutory provisions Paragraph 250(4)(a) Any corporation incorporated in Canada after April 26, 1965 is deemed to be a Canadian resident Subsection 250(5) A corporation which is deemed not to be a Canadian resident for the purposes of an applicable tax treaty is deemed not to be resident in Canada for all purposes of the Act Concern especially in regard to corporations incorporated in countries where there is no treaty with Canada 93

94 Corporate residency location of management In the absence of statutory or treaty provisions, residency is determined by common law Residence of the board of directors Location of directors meetings Location and manner of overall policy and decision making Daily decision making 94

95 Corporate residency What to look for Consolidated trial balance Is there income in jurisdictions with no tax treaty with Canada? Is there effective management of the company from Canada? 95

96 2011 Proposed Amendments In August 2011, new legislative proposals announced to foreign affiliate rules. These amendments include: New hybrid surplus rules; Income inclusion on certain upstream loans; Foreign affiliate reorganization provisions; Repatriation threshold based on ACB; Surplus anti-avoidance rules; Stop-loss rules; FAPI loss streaming prevention; and Additional surplus calculation guidance. 96

97 Conclusion Foreign affiliate issues are ever present Questions? 97

98 Section ten Reclamation 98

99 Deductibility of Reclamation Costs Reclamation involves a current promise or obligation to incur expenses in the future so as to permit the operators income earning active in years before these reclamation expenses are actually incurred Differs from ordinary repair expense Reclamation expenses incurred in later years: - still part of income earning process - considered ordinary operation cost of producing ore - deductible in full on income account when actually incurred - not regarded as on account of capital 99

100 Non-deductibility of future reclamation estimate GAAP requires future reclamation costs to be matched against revenue from the mine as the ore is produced. Under s18(1)(a) no deduction may be made in respect of an expense unless it has been incurred. Burnco case = leading authority an expense within the meaning of s. 18(1)(a) cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone. An obligation to do something which may in the future entail the necessity of paying money is not an expense. 100

101 Reclamation Trust Concept Under most provincial legislation a mining company must now deposit funds to be held in trust by the province to ensure sufficient funds would be available to reclaim mine sites once the mine cycle is complete. Sparked concern in mining industry pressure was put on federal government to introduce a RRSP model for future reclamation costs Instead Dept. of Finance introduced the concept of a mining reclamation trust in February 22, 1994 Federal Budget later expanded to concept of QET Qualifying Enviromental Trust 101

102 Reclamation Trust Concept Under QET concept: - actual contributions to provincially-mandated mining reclamation trusts may be deducted s 20(1)(ss) - Income accruing with respect to trust funds attributed to and taxed in hands of mining company as a beneficiary of the trust. s107.3(1) - All withdrawals from the trust are included in income whether representing previously taxed income or not s 12(1)(z.1) - Double tax intentional to compensate for the deferral benefit derived by the mining company from the upfront deduction of substantial contributions to the trust 102

103 QET Requirements Defined in s 248(1) In order to qualify at a particular time, trust must satisfy 3 conditions: 1. Must be resident in a province, 2. Must be maintained for the sole purpose of funding the reclamation of a site in the province that had been used primarily for, or any combination of, the operation of a mine, the extraction of clay, peat, sand, shale or aggregates or the deposit of waste, and 3. Maintenance of the trust must be, or become, required under the terms of a contract with the federal government or the province or require under a federal law or law of the province and the contract was entered into on for before 1 year after the day on which the trust was created. 103

104 QET Taxation Exempt from tax under Part 1 by virtue of paragraph 149(1)(z) Part X11.4 imposes special tax on these trusts. Tax = 28% of its income for the year calculated without reference to many of the normal trust taxation rules. Must file a tax return within 90 days of the end of each taxation year of the trust. Without further adjustments, the same income would be taxed twice - once at trust level and once at the beneficiary level. Part X11.4 tax is subject to a refundable tax credit under Example 104

105 Consequences of trust ceasing to be QET Significant: - Deemed year end - Deemed to have disposed of each of its properties at FMV - Trust beneficiaries shall be deemed to have received all the trust assets. Income inclusion = to amount deemed to have been received s 12(1)(z.1) - Each beneficiary will have a tax cost on its interest in the trust = to the value of the trust assets deemed to have been received at time of cessation of qualification. 105

106 Section eleven Provincial mining tax 106

107 Introduction Legislation: BC Mineral Tax Act BC imposes mining taxes on a mine-by-mine basis in two stages - 2% tax on Net Current Proceeds - 13% tax on Net Revenue Why two taxes? - 2% Net Current Proceeds tax is intended to provide compensation for depletion of the resource when production yields less than a reasonable profit for the producer (operating profit but may not have recovered all capital type costs) - 13% Net Revenue Tax is the real tax (See figure 1 next page) 107

108 Figure 1. NET REVENUE $0 Recovery of costs from operations Costs fully recovered No Tax Payable DISCOVERY DEVELOPMENT PHASE PHASE Net Current Proceeds Net Revenue Tax Tax (at 2%) (at 13%) PRODUCTION PHASE 108

109 Net current proceeds tax ( 2% tax ) Initial 2% tax is a form of minimum tax, which is fully deductible, with an interest component, against the 13% Net Revenue Tax Unused 2% tax is tracked in Cumulative Tax Credit Account which earns a notional interest at 125% of the prevailing bank rate (per Bank of Canada) If NCP is zero, then no tax is payable 2% tax paid can neither be carried back to previous taxation year, nor applied to other mines owned by the same operator 109

110 Net current proceeds tax Gross revenue Value of mineral product sold (including forward sale, but excluding hedging gain or losses); and cost recoveries, government grants and subsidies for current operating costs Less: Current operating costs - including post-production development costs, but excluding preproduction development and capital costs Less: Contribution to reclamation funds 110

111 Common non-deductible operating costs in computing net current proceed 1. Income tax expense 2. Lease / rental expense (could be added to CEA) 3. Royalty expense 4. Business interruption insurance 5. Financing costs 6. Interest expense 7. Exploration expense (generally could be added to CEA) 8. Pre-production development expense (could be added to CEA) 9. Write down of asset values 111

112 Net Revenue Tax ( 13% Tax ) General - Cumulative amount reflecting all revenues and expenditures, including capital costs, exploration and development costs incurred in developing mine and after production commences 112

113 Net Revenue Tax Defined (Refer to page 4 of BC Mineral Tax Return) Specifically: Gross operating revenue (from Net Current Proceeds calculation) Plus: Gross revenue on account of capital (proceeds on fixed asset sales and recoveries/grants/subsidies on capital assets) Less: Cumulative expenditures required to bring the net revenue to nil (if possible) [i.e. Cumulative Expenditure Account] 113

114 Cumulative expenditure account ( CEA ) Reflects all the operating expenditures, capital expenditures (including fixed asset purchases and lease costs) and changes in inventory Examples: - Pre-production discovery costs - Development costs prior to commercial production - New mine allowance (1/3 of new mine expenditure) - Total Current Operating Costs in calculating Net Current Proceeds - Net increase or decrease in inventory - Payments on leases and rentals - Cost of assets purchased - Investment allowance 114

115 New mine allowance To encourage new mine development in BC, the new mine allowance provides for an additional allowance of 1/3 of the capital costs of new mines and expansion of existing mines that begin commercial production after December 31, 1994 and before January 1, This means that 133.3% qualifying expenditures can be added to the Cumulative Expenditure Account of the mine. 115

116 Investment allowance Investment allowance is a provision for a return on an operator s investment in a mine. It is calculated using a notional interest factor (125% of the federal bank rate) that is applied to the average CEA balance. This is designed to approximate the cost of capital to the industry, regardless of the manner in which the costs are actually funded. That is, equity capital is treated the same manner as borrowed capital. 116

117 Putting it all together Step 1 Gross operating revenue Step 2 Total operating costs Step 3 2% tax Step 4 Investment allowance on opening unused 2% tax credit balance (if any) Step 5 Gross revenue (including revenue on capital asset) Step 6 CEA account Step 7 13% tax Step 8 Tax credit claim against NRT Step 9 Get client to write cheque 117

118 Numerical example Stage I Tax Revenue 3,000 Less Operating costs 1 (1,450) Net current proceeds 1,550 Stage 1 tax at 2% 31 A 118

119 Numerical example Stage II Tax Revenue 3,000 Less: Cumulative expenditure account opening balance 2 (-) Operating costs (1,450) New equipment and exploration (150) Net revenue 1,400 Stage II tax at 13% 182 Less: Credit for Stage I tax 3 (31) Net Stage II tax 151 B Total mineral taxes 182 A+B 119

120 Numerical example Notes: 1. Operating costs include mining, processing, transportation, selling, general and administrative expenses, but not royalties or capital expenditures 2. Assumes all costs incurred were claimed in previous years 3. Assumes no unclaimed carryforward from prior years 120

121 Administrative policies Filing Deadline A separate return is required for each mine Due 6 months after the fiscal year end of the mine Monthly Instalments Current year annual tax payable X [days in month / days in year] Due 90 days after month end Mineral Tax Return Attachments Financial statements Federal T2 121

122 Administrative policies File by Mail in supplementary information What if I don t file? PENALTIES!! $25 / day to a maximum of $2,500 5% of unpaid taxes What if I forget to make instalments? Interest accrual Where can I get the BCMT form (Excel workbook)? Is there more information available? 122

123 Section eleven Introduction to Ontario Mining Tax 123

124 Introduction 1. 10% tax on profit in excess of $500, Gross revenue Proceeds received from sale of out put; Proceeds received from hedging of output. 124

125 Exempt period For a three-year period, the first $10 million of profits generated by a new mine or major expansion of an existing mine is exempt from tax. This period is extended to ten years for new mines opened in remote Ontario locations. Furthermore, a 5% tax rate applies to profits from the operation of a remote mine once the holiday period is over. 125

126 Deductible operating costs in computing net current proceed 1. Cost of production 2. Processing and transportation 3. Depreciation (on straight line basis): 30% on mining assets; 100% up to income of mine if acquired before completion of new mine or major expansion; 15% on processing and transportation assets 4. Exploration and development expenses 126

127 Common non-deductible operating costs in computing net current proceed 1. Income tax expense 2. Royalty expense 3. Interest expense and other financing costs 4. Administrative expenses not directly related to earning mining profits 127

128 Processing allowance The annual processing allowance is calculated on the cost of all processing assets, based on the degree of processing achieved 15% of profits minimum 65% of profits maximum 128

129 Recent developments Functional currency reporting allowed for taxation years beginning after No changes to the Mining Tax Act were announced in the 2012 Ontario Budget, the Ontario government has announced that it proposes to review the Mining Tax Act with stakeholders "to ensure that Ontario receives fair compensation for its non-renewable resources" 129

130 Thank-you. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.