On May 6, 2013, the Québec Minister of Finance and the Economy, Nicolas Marceau, with the Québec Minister of Natural Resources, Martine Ouellet, made public the new mining tax regime for Québec, a fiscal measure that will apply to an operator’s fiscal year that begins after December 31, 2013. The new regime provides for mining taxes equal to the greater of (i) a minimum mining tax for a fiscal year, and (ii) a mining tax imposed on an operator’s annual profit for the relevant fiscal year. The Mining Tax Act (Québec) will be amended to implement the new mining tax regime. These modifications will override the tax regime that was instituted under the previous government which, as of January 1, 2012, had provided for a fixed tax rate of 16% on the operating profits of a mine.
During the last election campaign, the current government had promised to change the mining tax regime to a system similar to that which is currently applicable in Australia. This promise entailed a 5% royalty on the value of ore extracted from a given mine (a so-called "ad valorem" regime) as well as an additional 30% royalty on profits that exceed a threshold of 8% return on contributed capital. Since the election, however, industry stakeholders have all lobbied the government of Québec on this issue and made it aware that such a significant increase in fiscal burden could significantly undermine investment and employment in the Québec mining sector.
As a result, the government held the Forum on Mining Royalties on March 15 and 16, 2013, which allowed stakeholders in the Québec mining sector to share their respective views on the proposed reform, and on the economic and industry realities that Québec faces in a globalized and highly competitive market.
A Hybrid Tax Regime
The new tax regime is a hybrid model that combines two distinct and alternative taxes: (i) a minimum mining tax based on the total output value at the mine shaft head for each mine operated, and (ii) a progressive mining tax on profits based on the profitability of the annual output of all of an operator’s mines. Mining companies would only be required pay the greater of the two amounts.
The Minimum Mining Tax
The applicable rate for computing the minimum mining tax is 1% of the first $80M of output at the mine shaft head (which is determined by adding certain elements, such as the operator’s gross value of the annual output of a given mine, and deducting specific expenses relating to that mine), and 4% of the output value at the mine shaft head in excess of $80M. In the case where an operator is associated with one or more other operators during a given fiscal year, the $80M output at the mine shaft head threshold to which the reduced rate applies must be shared between the associated operators.
Payments made by an operator on account of the minimum mining tax would give rise to a non-refundable credit that may be claimed by the operator in a relevant fiscal year, where the operator is required to pay mining duties corresponding to the mining tax on its annual profit.
Amendments to Mining Tax on Annual Profit
In addition, for fiscal years beginning after December 31, 2013, the calculation of an operator’s annual earnings from a mine will be changed in order to take into account a newly enhanced processing allowance and modifications to the depreciation allowance (see "Depreciation Rules" and "Enhanced Processing Allowance" below). The other rules applicable to the calculation of an operator’s annual earnings from a mine and annual profit currently provided under the Mining Tax Act will remain unchanged.
The mining tax on annual profit will be calculated using progressive rates based on profit margins ranging from 16% to 28%, with a maximum effective tax rate of 22.9%. Each of the three rates will apply to a portion of the operator’s annual profit that will be allocated to the applicable segments of an operator’s profit margin.
Other Notable Highlights
New Depreciation Rules
A depreciation allowance will be granted to the operator in computing the output value at the mine shaft head, but this depreciation allowance will be limited to properties that are used in mining operation activities from the first accumulation site of the mineral substance after it is removed from the mine. Four new classes of depreciable properties will be created for such purpose and, generally, depreciation allowance related to these new classes will be computed on a straight-line basis.
Consequences Related to Termination of Mining Operations or Where a Property Ceases to Be Used
An operator who ceases, as of May 6, 2013, to be an operator for the purposes of the Mining Tax Act will be deemed to have disposed of the depreciable property that it uses in the mining operation immediately before such time for proceeds of disposition equal to the lesser of (i) the fair market value and (ii) the capital cost of such property at that time.
Similar amendments will be made such that an operator that ceases, at a particular time, to actually use certain properties in a mining operation will be deemed to have disposed of such property, at such time, for proceeds of disposition equal to the lesser of (i) the fair market value and (ii) the capital cost of such property at that time.
Enhanced Processing Allowance
The processing allowance has been enhanced in order to allow an operator that is engaged in processing activities in Québec to benefit, depending on the type of mineral and type of processing activities being carried out, from new increased rates. The rates range from 10% to 13% where the operator does not carry out smelting or refining, or where it carries out smelting or refining exclusively outside Québec. Where the operator carries out smelting or refining in Québec, the rates will vary between 10% and 20% of the capital cost of the property used for such activities, depending on certain specific requirements. In all cases, the processing allowance is subject to limits.
Reduction of the Adjusted Annual Loss
The computation of the annual loss on which the credit on duties refundable for losses is based will be adjusted to take the enhancements of the processing allowance into account.