Duties, royalties and taxesDuties, royalties and taxes payable by private parties
What duties, royalties and taxes are payable by private parties carrying on mining activities? Are these revenue-based or profit-based?
Corporations carrying on mining activities in Canada are subject to the general income tax rules applicable to all corporations. Federal income tax is levied under the Income Tax Act (Canada); the provinces and territories also have their own income tax statutes. A number of unique tax measures and rules also apply specifically to Canada’s mining industry.
As a general matter, royalties and mining taxes are imposed separately from income taxes by the province or territory in which the minerals are mined. The rates and basis of royalties’ calculation and mining taxes vary depending upon the type of mineral and the jurisdiction. In some jurisdictions, many minerals are not subject to provincial mining taxes or royalties. In other jurisdictions, the mining tax is levied on the basis of a progressive-rate system based on the mining profits or value of output, depending upon the particular jurisdiction. When the tax is computed by reference to mining profits, the rules for computing mining profits generally differ significantly from those applicable for income tax purposes. In many cases, an attempt is made to roughly calculate the mining profits at the pithead by permitting a processing allowance.Tax advantages and incentives
What tax advantages and incentives are available to private parties carrying on mining activities?
Recognising that mining is a highly cyclical and capital-intensive industry with a long lead time between initial investment and commercial production, the income tax systems and provincial mining taxes provide a generous treatment of exploration and other intangible expenses. They allow mining companies to recover most of their initial capital investment before paying a significant amount of taxes.
Canada’s Income Tax Act segregates exploration and development expenses into various pools and permits deductions for the pools in a specified order. The classification of an expense into a particular pool depends upon the date the expense was incurred, the nature of the expense and certain other considerations. Precise rules govern how these exemptions can be calculated. Examples of these exemptions are as follows:
- Canadian Exploration Expenses (CEE) - expenses incurred to determine the existence, location, extent or quality of a mineral resource in Canada and expenses incurred prior to the commencement of commercial production to bring a new mine into production (recent changes to the definition of CEE will include the costs associated with undertaking environmental studies and community consultations that are required in order to obtain an exploration permit).
- Canadian Development Expenses (CDE) - expenses incurred prior to the commencement of commercial production to bring a Canadian mineral resource into commercial production.
- Earned depletion allowance - certain depletion allowances are permitted as deductions from income since mineral resources are wasting assets.
- Purchase and sale of resource properties - the cost of acquiring a Canadian resource property is generally deductible on an annual 30 per cent declining-balance basis as a CDE.
- Flow-through shares - corporations carrying out exploration in Canada can pass on the deduction associated with certain types of expenses to shareholders by issuing flow-through shares. Investors that acquire flow-through shares may be eligible to a 15 per cent tax credit on flow-through mining expenditures that are incurred with the proceeds of the flow-through shares. This credit is usually only made applicable to expenditures prior to a certain date and is usually renewed for another year as part of the Federal Budget measures. In the November 2018, Economic Statement, the Federal Government the Government has decided to support mineral exploration efforts by extending the credit until 31 March 2024.
- The Economic Statement also provides an additional first-year Canadian development expense deduction for a taxpayer’s ‘accelerated Canadian development expenses’ of 15 per cent for taxation years ending before 2024, and 7.5 per cent for taxation years ending after 2023. This amount will be added to taxpayers’ cumulative Canadian development expenses at the end of the year, so as to determine the total amount deductible. For this purpose, an accelerated Canadian development expense is generally a Canadian development expense that is actually incurred after 20 November 2018 and before 2028. This includes development expenses renounced under flow-through share agreements entered into after 20 November 2018.
- Further, the Economic Statement also provides for an additional first-year oil and gas expense deduction for taxpayers’ ‘accelerated oil and gas property expenses’ of 5 per cent for taxation years that end before 2024, and 2.5 per cent for taxation years that end after 2023. This amount will be added to a taxpayer’s cumulative Canadian oil and gas property expenses at the end of the year, so as to determine the total amount deductible. For this purpose, an accelerated oil and gas property expense is generally a Canadian oil and gas property expense that is actually incurred after 20 November 2018 and before 2028.
- As part of the 2018-19 Québec Budget, Québec announced the introduction of an environmental studies allowance, similar to the community consultation allowance. Thus, an operator may deduct, in computing its annual profit for a fiscal year for purposes of the Mining Act (Québec), an amount on account of the environmental studies allowance with respect to environmental studies expenses incurred.
Most machinery, equipment and structures used to produce income from a mine or an oil or gas project are currently eligible for a capital cost allowance (CCA) rate of 25 per cent on a declining-balance basis.
In addition to the regular 25 per cent CCA deduction, accelerated CCA is provided for certain assets acquired for use in new mines or eligible mine expansions. The accelerated CCA takes the form of an additional allowance that supplements the regular CCA deduction.
The Income Tax Act was amended in 2013 to phase out the additional allowance available for mining (other than for bituminous sands and oil shale, for which the phase-out was completed in 2015). The additional allowance will be phased out over 2017-20. Taxpayers will be allowed to claim a percentage of the amount of the additional allowance otherwise permitted under the existing rules according to the following schedule:
The definition of CEE in the Income Tax Act was amended in 2013 to gradually remove certain pre-production mine development expenses from the definition of CEE and gradually treat such expenses as CDE. In accordance with the current definition of CEE, in addition to the expenses associated with the physical exploration for the resource, eligible expenses can include the cost of certain environmental studies and community consultations that are carried out for the purpose of facilitating the physical exploration; however, certain of these expenses have not qualified and have been treated as part of the cost of a licence. Provinces and territories are increasingly requiring mining, oil and gas companies to undertake environmental studies and community consultations (eg, with local communities, neighbouring landowners, traditional and recreational users of the land) as a pre-condition to obtaining a permit or licence to explore. However, where environmental studies and community consultations are a pre-condition to obtaining such permit or licence, the expenses may be treated as part of the cost of the permit or licence. As part of the 1 March 2015 Federal Budget, the Canadian government announced that the rules would be amended to provide that CEE treatment would not be denied for the cost of otherwise eligible environmental studies and community consultations solely because they are a pre-condition to obtaining an exploration permit or licence. The cost of obtaining a permit or licence does not qualify for CEE treatment and is not eligible for flow-through share treatment. As a result, certain expenses related to environmental studies and community consultations have been treated differently for tax purposes from one jurisdiction to another, depending upon the requirements of the regulator. To ensure the appropriate treatment of such expenses, the definition of CEE has been amended for expenses incurred after February 2015 to include the cost of otherwise eligible environmental studies and community consultations required to obtain an exploration permit or licence.Tax stablisation
Does any legislation provide for tax stabilisation or are there tax stabilisation agreements in force?
Canada does not legislate for tax stabilisation; no tax stabilisation agreements are in force.Carried interest
Is the government entitled to a carried interest, or a free carried interest in mining projects?
This is not practised in Canada. The federal and provincial governments do not get involved by holding any interests in mining projects (with the exception of that noted in question 16, but such an interest would never be carried).Transfer taxes and capital gains
Are there any transfer taxes or capital gains imposed regarding the transfer of licences?
Canadian residents are subject to income tax on gains arising from the transfer of leasehold interests.Distinction between domestic parties and foreign parties
Is there any distinction between the duties, royalties and taxes payable by domestic parties and those payable by foreign parties?
Canadian residents are subject to tax on their worldwide income. A non-resident of Canada is subject to Canadian income tax on income from employment exercised in Canada, income from carrying on business in Canada and gains arising from the disposition of ‘taxable Canadian property’, which includes any interest in resource properties in Canada. A non-resident corporation that carries on business in Canada is also liable to pay branch taxes equal to 25 per cent of its profits, to the extent such profits are not reinvested in the Canadian business.
Certain types of property income paid to a non-resident by a Canadian resident (including rents and royalties) are subject to a 25 per cent non-resident withholding tax. Canadian income taxes payable by a non-resident of Canada may be reduced or be eligible for exemptions under an applicable tax treaty. In some provinces, there is potential for non-residents to be subject to land transfer taxes and equivalent duties on the acquisition of mining properties in Canada at tax rates that are higher than those imposed on Canadian residents.