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 profit-based 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, tax credits and incentives are available to private parties carrying on exploration and mining activities?
As is the case in other sectors, a corporation engaged in exploration and mining activities is entitled to deduct expenses incurred for the purpose of earning income. In addition, a corporation is entitled to deduct certain capital expenditures, including tax depreciation on tangible capital assets (capital cost allowance (CCA)). Recognising the capital-intensive nature of the mining industry, and to ensure the international competitiveness of the Canadian resource industry, the tax regimes applicable to exploration and mining contain a number of incentives designed to encourage investment, including:
- mining taxes and royalties paid to a province or territory with respect to income from a mineral resource are fully deductible when computing income for federal income tax purposes;
- the depreciation of tangible assets for income tax purposes is allowed under the CCA system, under which the capital cost of a depreciable asset is included in a particular asset class, for which a maximum annual depreciation rate is prescribed. In addition, in 2018, the federal government introduced the Accelerated Investment Incentive, which provides for an enhanced first-year CCA deduction for certain properties that become available for use before 2028. A phase-out will begin for assets that become available for use after 2023. A mining company that is a Canadian-controlled private corporation can also immediately expense 100 per cent of the value of CCA-eligible property acquired after 18 April 2021 that becomes available for use before 1 January 2024, up to a maximum amount of C$1.5 million per taxation year, with some exceptions. This expense must be claimed in the first year the property is available for use;
- certain other resource or mining expenses may also be deducted on a current or declining-balance basis. These expenses are added to cumulative resource pools classified as Canadian exploration expenses (CEE) and Canadian development expenses (CDE):
- CEE include expenses that are incurred by the taxpayer for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada. Generally, CEE may be deducted at a rate of 100 per cent, up to the taxpayer’s income for the year. Any unclaimed CEE may be carried forward indefinitely; and
- CDE include expenses that are not CEE and are incurred for the purpose of bringing a new mine in Canada into production (ie, pre-production mine development expenses). CDE may be deducted at a rate of 30 per cent on a declining-balance basis. Unclaimed CDE may be carried forward indefinitely. An enhanced deduction is also available for CDE incurred before 2028, with such expenses qualifying for a first-year deduction equal to 1.5 times the deduction that would otherwise be available. A phase-out will begin for expenses incurred after 2023;
- certain corporations carrying out exploration and mining activities in Canada can issue flow-through shares, pursuant to which the tax deductions attributable to certain expenditures incurred (eg, CDE and CEE) are renounced by the corporation to the flow-through shareholders such that the shareholders (and not the corporation) may deduct the renounced expenditures in computing their income. An additional 15 per cent federal Mineral Exploration Tax Credit may be available with respect to certain flow-through mining expenditures (with many provinces offering parallel credits). In the 2018 federal budget, the federal government extended this credit until 2024. In British Columbia, the parallel provincial 20 per cent Mining Exploration Tax Credit (enhanced to 30 per cent in prescribed Mountain Pine Beatle affected areas) was made permanent in 2019;
- contributions made to a qualifying environmental trust used to fund future reclamation are deductible in the year in which they are made (as opposed to reclamation expenses, which are generally recognised for income tax purposes at the time the reclamation is carried out); and
- provincial governments also provide certain tax incentives for exploration and mining activities that are carried out in the province. These incentives take the form of income tax credits or relief with respect to provincial mining taxes. For example, the province of Ontario provides an exemption from mining taxes on up to the first C$10 million of profit for a new mine or the expansion of an existing mine.
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?
No, the federal and provincial governments do not get involved by holding any interests in mining projects.Transfer taxes and capital gains
Are there any transfer taxes or capital gains imposed regarding the transfer of licences?
A mining project may be disposed of by way of a sale of the mining assets or of the relevant entity in which the mining project is held. The disposition of capital property in Canada generally results in a capital gain (or loss), with one-half of any capital gain being included in income. The disposition of mining assets may result in income (in the case of resource property), recapture (in the case of depreciable property) and capital gains on capital property. Non-residents are subject to tax in Canada on the disposition of ‘taxable Canadian property’, which includes real property and resource property situated in Canada, property used by the taxpayer in certain businesses carried on in Canada, and certain shares and partnership or trust interests that derive their value from real property or resource properties situated in Canada. Most provinces impose land transfer taxes on transfers of real property. The rates of land transfer tax vary by province, and transfers of resource properties are often exempt from land transfer tax.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.