Current Issue Review 79-8E MINING TAXATION IN CANADA John R. DeGrace Science Technology Division 14 August 1979 Rev/c wed 14April 1980 1 Library Parliament Biblioque du Parlement Research Branch
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CANADA LIBRARY OF BIBLIOTHEQUE PARLIAMENT u PARLEMENT MINING TAXATION IN CANADA ISSUE DEFINITION Mg has always been an important contribur Canadian economy way life. The gross value meral production Canada (excludg fossil fuels) has contributed an annual average 4.5 per cent Canada s gross national product sce 1950. In 1978 dustry paid close $3 billion wages salaries. Begng late 1974, however, dustry underwent a 4year cyclical recession, worst sce Second World War. In same year significant changes federal provcial tax structures, as y relate mg, had begun take effect. The mg dustry has blamed many its recent problems on equitable taxa tion, dustry complats contributed an easg tax burden at both federal provcial levels late l970s. Neverless, re is still disagreement between dustry government as what would constitute an appropriate level taxation, between federal provcial levels government as an acceptable formula for tax revenue sharg. It is gener ally recognized that a stable equitable tax structure is necessary for mg dustry growth that a simplified regulary framework is most desirable. The resolution problem will require a clear understg issue by Parliamentarians, both political economic farsightedness arrivg at a workable longterm solution.
2 BACKGROUND AND ANALYSIS A. - Hisrical Background The British North America Act provides that provces Canada have merals, jurisdiction over ir with ir boundaries. must be made asbess, oil meral resources, ss consequently are salt which base precious metals, Income dustrial merals such as shale, peat sne. for cludg For tax purposes, however, a distction between such meral commodities as coal, not eligible respective natural resources, Tax Act defes as s gravel, clay, Companies exploitg latter group merals are many subject deductions applicable potentially heavier tax former burdens. This report refers only group classified as meral resources. The provces can do levy direct provcial mg (cludg royalties) addition provcial corporate come tax. provces, regulation Federal trade system taxation. mg companies. Government commerce Accordgly, is constitutionally raisg restricted money tax In by any mode or a federal corporate come tax is levied on Federal provcial taxation formulas applicable mg secr were reasonably stable for most postwar years up late l96os, but sce n systems have been altered several times with result tax that effective margal rates-)for dustry have creased considerably. At federal level, changes were rooted Recom mendations Royal Report) 1967. for mg Commission on Taxation (sometimes called Carter The Report recommended withdrawal special centives dustry on basis that tax neutrality between economic secrs was a desirable national goal, that tax centives allowed mg dustry were extremely costly terms lost government revenue (1) For purpose this review, effective tax rate is defed as ratio tal Federal Provcial come tax (cludg royalties) payable, beforetax prit. The margal tax rate is tax applied last dollar come.
3 economic efficiency. adopted Many Carter Commission recommendations were by Government a white paper on tax reform November 1969, changes changes mselves began come effect on 1 January 1972. cocided with a shortlived commodities boom 1973 These 1974, what many saw as excess prits taken by dustry. It may be as well that dramatic creases world oil prices imposed by OPEC nations 1973 exacerbated situation: There is policy science field an fluence known as demonstration effect fluence result observed activities elsewhere. It is possible that envy for Alberta position petroleum natural gas was translated positive measures or provces (particularly Maniba, Saskatchewan, British Columbia, but cludg Ontario Quebec some degree), led a determation get a better return from meral resources which were an important basis ir natural resource wealth.(1) The new provcial production levies were still deductible for calculation federal come tax, magnitude provcial creases severely eroded Federal Government, which was period from 1972, stead federal phasg come tax base. its planned Accordgly, changes over a 5year troduced its new taxation formula Nay 1974. The result was that, when boom ended, Federal Provcial Govern ments were left competg for a larger share dimished prits, dustry spokesmen complaed adequate returns on ir vestment. It was not until 1977 1978, however, that situation was evaluated a quantitative, dustry cooperatively. analytical fashion by governments This was done by economic modellg real hypotical mes for both pre1972 period late l97os. (1) R.M. Burns, Conflict its Resolution Admistration Meral Resources Canada, Centre for Resource Studies, Queen s University, Kgsn, 1976, p. 6.
BIBLIOTHEQUE DU PARLEMENT 4 B. Mg Tax Systems Canada After operated under a tax Second World War, system characterized prior by 1972, longterm Canada had stability provisions, key which were as follows: 1. A threeyear tax holiday was allowed on come from new mes after start significant production. 2. An aumatic depletion allowance tax rate by 33 1/3 per cent. 3. Prospectg, exploration development expenses were applicable as deductions agast taxable come a corporation whose prcipal busess was mg or explorg for merals Canada. 4. The cost meral properties was nondeductible, but proceeds sale a meral property were tax free. 5. The provces levied mg royalties at low rates, or assessed mg prit taxes at rates not exceedg 15 per cent. The provcial taxes royalties were deductible when computg come subject federal come tax. Begng chronology), changes were 1972, troduced n leadg reduced 1974, effective 1975 followg 1978 federal provisions (summarized) which are force at time writg: 1. The former threeyear tax holiday on new mes was discon tued at end 1973, come from new mes is taxed from start production. 2. The federal tax rate is now 36 per cent, which prov cial come taxes are added. The aumatic depletion allowance was cancelled Nay 1974 has been replaced by what is termed earned depletion, which is earned by makg expenditures on eligible vestments at rate $1 depletion for each $3 vestment. Earned depletion may be claimed any one year at 25 per cent come remag after almost all or deductions have been taken. Sce 1 January 1976, taxpayers have also been able deduct a resource allowance from taxable come. The resource allowance is allowed as a deduction lieu deduction provcial produc tion levies, is computed at 25 per cent tax payer s come after deduction operatg costs capital cost allowance. (see tax
5 3. Exploration development expenses contue be deductible but, whereas exploration expenses are fully deductible extent needed elimate taxable come, amortization development expenses is on a 30 per cent declg balance basis. 4. The cost mg properties is deductible as a develop ment are taxed full. 5. Sce May 1974 provcial mg taxes royalties have been nondeductible computg come subject federal come tax. Meanwhile, most Provcial Governments have substantially raised altered ir mg levies. C. Results Economic Modellg The use me models compare resource taxation regimes has been undertaken Resources, Studies at procedures, Energy, Canada Mg Queen s by Federal Association University. results Department Canada, Despite have been Mes Resources mor substantially Energy, Centre Mes for Resource differences modellg In June same. Mg Association Canada 1977 formed a task force exame problem, ir me models are referred here because y represent perhaps best consensus yet reached as effects resource taxation. In comparisons operatg mes located Canada. which follow, mes life for a tal 16 8 years. years per day. actual Production statistics for The capital cost Production projected production exclusive Me B is a porphyry copper molybdenum open pit me mill located western Canada. nnes are operation 8 years workg capital, is $51 million 1978 dollars. about 40,820 B Me A is a 2,720 metric ns (nnes) per day underground base metal me western Canada. taxation year consist A statistics for Mill capacity is taxation purposes consist 6 years operation a projected life 14 years for a tal life 20 years. The capital cost production, excludg workg capital, is $272 million 1978 dollars. --
6 The mes were treated as new mes with start construc tion on January 1, 1978, all figures were stated constant 1978 dollars. The results are relevant most mg operations Canada, models were constructed for mes under taxation systems Newfoundl, New excluded because potash uranium are special cases that provce, with come from production both commodities taxation than is case with or merals. beg subject heavier The result me modellg compare 1971 1978 tax systems is summarized Table 1: TABLE 1: COMBINED FEDERAL AND PROVINCIAL TAXATION LEVELS IN 1978 (1971 LEVELS IN BRACKETS) FOR MINES A AND B. Provce B.C. Man. Ont. Que. N.B. Nfld. Source: Effective Tax Rate, % A B 46.7(26.0) 57.4(24.3) 47.4(26.9) 41.5(25.7) 45.0(23.6) 43.7(20.1) 47.5(36.6) 56.1(37.4) 54.9(37.1) 47.9(37.0) 44.5(34.3) 43.1(32.0) Max. Margal Tax Rate, % A B 56.9(41.8) 73.3(45.0) 56.9(44.5) 57.3(43.2) 53.7(40.1) 55.3(38.6) 56.9(43.3) 73.3(45.0) 70.7(44.5) 66.0(45.0) 53.7(41.3) 53.5(38.6) Summarized from E.K. O Brien M. Power, Usg Me Models Assess Resource Taxation, Canadian Institute Mg Metal lurgy, 81st Ann. Gen. Mtg., Montreal, preprt, April 1979, 29 p.
BIBLIOTHEQUE DU PARLEMENT 7 D. Industry Government Response It is apparent dramatically l970s. that taxation rates for mg have Neverless, effect new tax structures on health mg dustry is not immediately obvious. dollars) has shown a slight overall decrease not varied l970s, but trend has years or more, so start production that one would not expect positive correlation rate, is between meral structive exploration consider is typically six see results taxation reflected so soon production statistics. more An important consideration, though, is that lead time between discovery a deposit Canada. The value significantly from cyclical patterns hisrically typical meral secr. it climbed excessive Granted that re is a expenditure changg exploration discovery patterns Durg period 1969 1975, annual expenditures on grass roots exploration decreased, real terms, by 23 per cent, over same period number companies engaged exploration dropped by 42 per cent. Furrmore, most decle number operars (from about 750 450) was terests. declg for Meanwhile, with contued estimated accounted by withdrawal ore reserves production. small, dependent Canada s existg The Mg Association that around 280 new mes will have be mes are Canada has found developed last two decades this century order replace depletg ore mata Canada s ternational market share. This is approximately equal number mes now production Canada. Small wonder, n, that sce 1972 mg been complag vociferously about new tax structures. 1978, Secr Task Force on Canadian nonferrous dustry has Most recently, metals concluded that The taxation mg come across Canada is chaotic perverse. It has resulted a situation development all but richest discoveries which Canadian dustry
8 would As a below alone be uneconomic even when dem prices improve. result, exploration activity this secr is far levels needed susta present production, let provide for growth.(1) Based on me modellg techniques outled above, Mg Association Canada recommended that Federal Provcial Governments uniform defition taxable mg agree upñà come, upon a combed federal provcial tax rate not excess 45 per cent. The Mg Association Canada recommended that Federal Government should immediately: 1. crease resource allowance from 25 per cent 33 113 per cent; 2. allow development expenses be deducted at a rate 100 per cent year curred; 3. exp earned depletion clude qualifyg expenditures on social frastructure purchase Canadian resource properties. The compilers FederalProvcial Resource Taxation Review did not entirely share view Secr Task Force Mg Association Canada. They concluded that First, aggregate burden taxation on Canadian mg dustry is generally le with treatment or dustries, recognizes special characteristics dustry. Secondly, while taxation dustry creased l970s, this was directed ward achievg a more equitable distribution taxes among dustries; a fair return governments, a better allocation resources economy. It should be recognized that climate surroundg tax changes over recent past has led uncertaty. Also, creased tax burden may have contributed somewhat a reduced attractiveness vestment.(2) (1) A. Powis, Chairman, A Report By Secr Task Force on Canadian NonFerrous Metals Industy, Report Department Industry, Trade Commerce, Ottawa, 1978, p. 5. (2) E.P. Neufeld, Chairman, FederalProvcial Resource Taxation Review (Jot Report by Federal Provcial Officials Fance Misters Resource Misters), Discussion Paper for First Misters Conference on Economy, Document No. 8009/018, Ottawa, 2729 November 1978, p. 20.
UflARY OP PARUAMENT RISUOTHEQUC DU PARLEMENT 9 It was recommended that governments endorse prciple tax regime stability terest reducg vesr uncertaty. The compilers recognized possible need for special tax treatment some parts resource secr, importance avoidg competitive taxation between governments. The formal response Government Csnada report Secr Task Force on Canadian nonferrous metals dustry wes published Nay 1979. The response generally reiterated views expressed FederalProvcial Resource Taxation Review given substance budget 16 November 1978. The Government committed itself not take action fset benefits from tax reductions that provces might troduce. PARLIAMENTARY ACTION On 5 November 1979, House Commons passed Bill Cli, An Act amend statute law relatg come tax amend Csnada Pension Plan. The ma provisions affectg mg dustry are as follows: 1. preproduction me development expenditures are be deductible at 100 per cent; vestment tax credit is extended for an defite period. The basic rate is creased from 5 per cent 7 per cent, 10 per cent 20 per cent dependg upon location use qualified property Csnada. 2. provisions are effect from 16 November.1978, date when y were origally proposed by previous Liberal Government its last Federal budget. Bill 0-37, Act embodyg measures which had received first readg on 29 January 1979, died on order paper with dissolution Thirtieth Parliament on 26 March 1979. In March 1979, Liberal These Government passed an Order--Council (with effect from 17. November 1978) allowg expenditures on wusites social assets be eligible for earned depletion. This regulation remas effect.
10 CHRONOLOGY February 1967 The Royal Commission on Taxation (Carter Report) recom mended withdrawal mg centives tax statutes. threeyear taxexempt period for new mes, effective 1 January 1974. This was be replaced by an acceler ated capitalcost allowance for new mes for major expansion existg mes. Major expansion meant an crease 25 per cent or more rated capacity. Also proposed was withdrawal aumatic depletion, effec tive after 1976. This was be replaced by an earned depletion system, with traditional maximum depletion allowance onethird production prits rema. August 1970 Ottawa announced that after 1976 provcial mg levies would no longer be deductible. Instead, an additional come tax abatement 15 per cent would be granted effect reducg federal come tax rate by 15 percentage pots. January 1972 February 1974 The new federal Income Tax Act began come effect. It contaed few immediate measures relatg mg tax, as proposed changes were not take effect until later. British Columbia troduced Meral Royalties Act amended Meral L Tax Act. Both changes applied two tiers royalties basic royalties (on both sales prits) a royalty on super prits (computed with reference some basic metal price). April 1974 April 1974 May 1974 Ontario Maniba announced higher mg mg companies operations, beg 1974. taxes on Quebec said it would assess mg tax situation. In December 1974 it enacted temporary new higher rates effective retroactively 1 April 1974. Effective 1 April 1975, adjusted permanent rates were established. Saskatchewan troduced a reserve tax on potash mes, effect a royalty. The complex formula is based on grade ore, production capacity, capital vestment ore prices. The reserve tax became effective 1 July 1974.
11 May 1974 The federal budget announced end deductibility provcial mg taxes royalties troduction extra 15 per cent abatement, effective immediately. It thus accelerated earlierannounced timetable for se two measures. It also cancelled aumatic depletion, effective immediately. Instead earlier production prits, maximum was now reduced onequarter. The budget also creased basic federal tax rate for mg prits 50 per cent from 46 per cent proposed that exploration development expenses be deductible at 30 per cent on a declg basis. (Until n, such expenses were deductible at 100 per cent.) This budget was defeated, precipitatg July 1974 federal election. November 1974 January 1975 June 1975 January 1977 July 1977 March 1978 Mg measures from May federal budget were retro duced tact, except that exploration expenses could be written f at 100 per cent stead 30 per cent; but 30 per cent rule still applied development expenses meral rights acquisition costs. Newfoundl s Mg Meral Rights Tax Act came effect, imposg higher tax on prits royalties. The federal budget discontued 15 per cent abatement (which reduced tax payable) replaced it with a 25 per cent resource allowance (which reduced taxable come), effective 1 January 1976. At same time, federal rate was reduced 46 per cent from 50 per cent match rate applicable or companies. British Columbia s twotier royalty system was cancelled replaced with a more traditional mg tax on prits. New Brunswick troduced a twotier tax system imposg a 2 per cent royalty on net smelter returns a 16 per cent tax on net prit, effective 1 April 1977. The Ontario budget proposed mor changes Mg Tax Act aimed at somewhat lighteng tax burden through more generous deduction allowances. Corporate taxes were creased by 1 per cent 13 per cent as 25 April 1978.
12 November 1978 The federal budget troduced features affectg mg: extension vestment tax credit for an defite period with basic rate creased from 5 per cent 7 per cent (regionally higher)., preproduction development expenses deductible at 100 per cent, expenditures on wnsites social assets eligible for earned depletion. 26 March 1979. March 1979 April 1979 May 1979 November 1979 The Quebec budget troduced features affectg mg taxation. Onsite exploration development expendi tures after start production became eligible earn an vestment allowance, deductible any one year a maximum 33 1/3 per cent prits. The basic exemption was creased from $150,000 $250,000, begng 1 January 1979, extension carry forward 15 per cent an annual operatg loss was creased from 2 4 years. The Ontario budget troduced features affectg mg taxation. The p margal mg tax rates 35 per cent 40 per cent were reduced 30 per cent, basic exemption was creased from $100,000 $250,000, Norrn Ontario processg allowance was reduced from 30 per cent 25 per cent for refg from 35 per cent 30 per cent for semifabricatg. The Maniba Government announced that begng 1 January 1979, twotier royalty system n effect was elimated replaced by a flatrate royalty 18 per cent on taxable come from mg. Under new system maximum margal tax rate is reduced about 56 per cent from previous possible maximum over 73 per cent. Bill Cl7 (passed 5 November 1979) retroduced measures proposed by previous Government November 1978.
13 SELECTED REFERENCES (1 ) Brown, R. D., Canadian Taxation Mg Bullet, Vol. 72, No. 811, 1979, p. 108110. Industrial Merals, CIM Resources Canada, Kgsn, 1976, 63 p. Centre for Resource Studies, Queen s University, (3) Canada, Department Industry, Trade Commerce, Response Federal Government Recommendations Consultative Task Force on Canadian NonFerrous Metals Industry, Ottawa, 1979, 29 p. (4) Canada, House Commons, Bill C37, An Act Amend Statute Law Relatg Income Tax, Amend Canada Pension Plan Provide Or Authority for Raisg Funds, 4th Session, 30th Parliament, 29 January 1979, 91 p. (5) Holl, E.N. R.M. Kemp, Canadian Taxation Mg Income, CCH Canadian Limited, Ottawa, 1978, 269 p. (Library Parliament HJ/4l69/ H64) (6) MacKenzie, B.W. M.L. Bilodeau, Effects Taxation on Base Metal Mg Canada, Centre for Resource Studies, Queen s University, Kgsn, 1979, 190 p. (Library Parliament HD/9506/C22/M25E) ( 7) McDonald, J. G., Canadian Royal Commission on Taxation Taxation Income from Natural Resources, Butterworths Carter Report Studies No. 2, Butterworths, Toron, 1967, 38 p. (Library Parliament J/1O3/Pl/ l962/t3/z5/b.88/no. 2) (8) Neufeld, E.P., Chairman, FederalProvcial Resource Taxation Review (Jot Report by Federal Provcial Officials Fance Misters Resource Misters), First Misters Conference on Economy, Document No. 8009/018, Ottawa, 2729 November 1978, 60 p. (Library Parliament +HJ/795/Al/A5/l978/Nov./Al3/v. 2) (9) O Brien, E.K. M. Power, Usg Me Models Assess Resource Taxa tion, Canadian Institute Mg Metallurgy, 81st Annual General Meetg, Montreal, preprt, 24 April 1979, 29 p. (10) Powis, A., Chairman, A Report By Secr Task Force on Canadian NonFerrous Metals Industry, Report Department Industry, Trade Commerce, Ottawa, 1978, 14 p. (Library Parliament HD/2356/C2/A35/M5/ Al2)