Last May 6, the Québec ministère des Finances tabled information bulletin 2013-4 (the “Bulletin”) exposing the amendments that will be made to the Québec mining tax regime. When it tabled the 2013-2014 budget, the Québec Government had announced that it intended to amend the mining tax regime.
The main amendments to the mining tax regime are:
- Implementation of a minimum mining tax as well as a non-refundable credit on account of the minimum mining tax;
- Replacement of the single tax rate with progressive tax rates on annual profits;
- Requirement for all operators to pay mining duties corresponding to the greater of their minimum mining tax or the mining tax on their annual profit;
- Improvement to the processing allowance in order to foster processing in Québec; and
- Implementation of integrity rules for operators.
It is important to bear in mind that before these measures can come into force, a bill must be introduced to and adopted by the National Assembly. Given the government’s minority status, the support of one of the two main opposition parties will be needed. As of the date hereof, the main opposition parties have not yet communicated their position.
That being said, the announced measures are generally expected to apply to any fiscal year of an operator starting after December 31, 2013 (as specified below, some measures will come into force on May 6, 2013).
1. Minimum Mining Tax (the “Minimum Tax”)
An operator’s Minimum Tax will be calculated, for each fiscal year, by applying a 1% tax rate to the first $80 million of the operator’s output value at the mine shaft head (“OVMSH”) in respect of all the mines it operates. The Minimum Tax also includes an amount calculated at a tax rate of 4% to the amount corresponding to the OVMSH in respect of all the mines it operates, over an amount of $80 million.
The OVMSH of a mine corresponds to the gross value of the annual output attributable to the operation of a mine, from which value are subtracted expenses incurred from the first accumulation site of the mineral substance after it is removed from the mine (crushing, grinding, sieving, processing, handling, transportation, storage, marketing activities, administrative expenses), depreciation allowance for property used in mining operation activities from the first accumulation site of the mineral substance after it is removed from the mine and a processing allowance equal to the one used to calculate the annual earnings that an operator will generate from a mine.
For the purposes of the depreciation allowance, the property used in mining activities that already belong to the depreciation classes 1 through 4 will, early in the fiscal year beginning after December 31, 2013, be transferred to new depreciation classes 1A to 4A. These new classes will have depreciation rates of 15% for class 1A, 30% for classes 2A and 4A, and 100% for class 3A.
The processing allowance may not exceed the lesser of:
- The total capital cost of property used to process minerals, multiplied by a rate of 10%, 13% or 20% depending on the processing activities performed by the operator; or
The greater of:
- 75% of the annual earnings of the mine, before deducting certain allowances; and
- 30% of the OVMSH of a mine, before deducting the processing allowance.
The OVMSH in respect of a mine may in no case be less than 10% of the operator’s gross value of annual output from the mine for such fiscal year.
This calculation corresponds to the following table:
Click here to view table.
2. Mining Tax on Annual Profit
The existing rules will continue to apply, subject to the addition of new integrity rules and amendments introduced by the Bulletin to the calculation of an operator’s annual earnings from a mine and to the tax rates that apply to calculate taxes on annual profit.
The processing allowance that an operator may deduct when calculating its annual earnings from a mine as described above is improved in order to foster processing in Québec.
When calculating the annual earnings from a mine it operates, an operator may deduct an amount on account of depreciation allowance for property of classes 1A through 4A that is attributable to the operation of the mine, provided that this amount is equal to the amount deducted on that account in the calculation of the OVMSH in respect of the mine. Without this equivalent deduction, no amount may be deducted as a depreciation allowance for the purposes of calculating the annual earnings of a mine.
The 16% tax rate applicable for the determination of the mining tax on annual profit will be replaced, for a fiscal year starting after December 31, 2013, with progressive tax rates ranging from 16% to 28%. The rates will be determined on the basis of the operator’s profit margin for the fiscal year. The profit margin will correspond to the ratio of the gross value of annual output in respect of each mine (established as per the current regime) over the gross value of annual output.
The following table presents an illustrative scenario of tax rates based on profit margins, as defined. The rates will apply to each segment of profit margin, as is done under the personal tax regime.
Thus, according to the following table, a business with a 50% profit margin will see the portion of its annual profit attributable to the first segment of profit margin taxed at a rate of 16%, and the excess of its profits taxed at a rate of 22%, for an effective tax rate of 17.8% on all of its profits.
Click here to view table.
To summarize, operators will pay the greater of the Minimum Tax and the mining tax on their annual profit. Where the Minimum Tax exceeds the mining tax on their annual profit, that excess amount will be included in a separate cumulative minimum mining tax account for that operator. This balance will enable the operator to reduce the amount of mining duties payable where its mining duties payable will correspond to its mining tax on its annual profit, although that amount cannot be less than the Minimum Tax for the fiscal year at issue.
The calculation of annual loss will also be adjusted to reflect the improvement to the processing allowance.
3. Non-Refundable Credit on Account of the Minimum Tax
Operators that are required to pay a mining tax on their annual profit may deduct from their mining duties payable, for the fiscal year, an amount corresponding to their non-refundable credit on account of the Minimum Tax (the “MM Credit”) for that fiscal year.
The MM Credit will correspond to the lesser of the following amounts:
- the excess of the mining tax on the operator’s annual profit, for the fiscal year, over the operator’s Minimum Tax for the fiscal year; and
- the cumulative balance on account of an operator’s Minimum Tax at the end of the fiscal year.
The cumulative balance on account of an operator’s Minimum Tax, at a given time, will correspond to the excess of all of the amounts each of which is the excess, if any, of the operator’s Minimum Tax for a fiscal year ended before such time over the mining tax on the operator’s annual profit for that fiscal year ended before such time over all of the amounts each of which is an amount of MM Credit deducted by the operator for a fiscal year ended before such time.
In the case where an operator is part of an amalgamation, as that term is defined in the Mining Tax Act, with one or more other corporations, its cumulative balance on account of the Minimum Tax will be transferred to the corporation resulting from the amalgamation according to the usual rules.
4. Integrity Rules for Operators
The Mining Tax Act will be amended so that a person or partnership that ceases, for an indeterminate period, all activities relating to its mining operation will be deemed to alienate, immediately before such time, each of its property of classes 1 to class 4 and of classes 1A to 4A, for proceeds of alienation equal to the lesser of the fair market value of such property at the time of alienation or the capital cost of such property at such time. Rules are also contemplated to provide for cases where the operator resumes its activities. Those rules will apply as of May 6, 2013.
The same principle and rules will apply, also starting as of May 6, 2013, when an operator ceases to use a specific property in the course of mining operations.
The Mining Tax Act will also be amended so that an operator and an associated entity will be deemed to be one and the same person for the purposes of implementing the Act and the mining tax payable when an operator alienates, directly or indirectly, in favour of an entity with which it is associated, all or part of the mineral substances. The operator and the associated entity will be jointly and severably liable for payment of the mining tax owed for that fiscal year.
The Québec Government expects that by 2020, with these amendments, its revenues will increase by anywhere between $73 and $200 million per year, including $50 million for the fiscal year 2015, all of this depending on world market prices for resources and the profitability of mining operations.