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 that carry on exploration and mining activities in Canada are subject to the general profit-based corporate income tax rules that apply to all corporations operating in the country. Income tax is imposed at the federal level, under the Income Tax Act (Canada), and at the provincial and territorial level under the respective income tax statute. The current Canadian federal corporate tax rate is 15 per cent, and provincial tax rates range from 8 per cent to 16 per cent.
A non-resident corporation that carries on business in Canada is subject to income tax on its income from such business at the same corporate tax rate that applies to Canadian resident corporations, and is also subject to a 25 per cent ‘branch tax’ on profits not reinvested in Canada. The branch tax is intended to approximate withholding tax on dividends, and where dividend withholding tax rate is reduced under an applicable tax treaty, the branch tax is generally correspondingly reduced. In addition, a non-resident is subject to income tax in Canada on the disposition of ‘taxable Canadian property’, which includes any interest in real or resource properties situated in Canada, and certain shares and partnership or trust interests that derive their value from such properties. Canada levies a 25 per cent withholding tax on certain payments to non-residents, including dividends, certain interest payments, rents and royalties. The rate of Canadian withholding tax may be reduced if the non-resident recipient is eligible under one of Canada’s tax treaties.
Each province and territory also levies separate mining taxes or royalties on mining activities; with varying rates. In many provinces and territories, the mining tax is computed by reference to mining profits, whereas certain provinces impose royalties that vary according to the specific mineral.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 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. Most machinery, equipment and structures used to produce income from a mine are currently eligible for a CCA rate of 25 per cent on a declining-balance basis. In addition, in 2018 the federal government introduced an ‘Accelerated Investment Incentive’, which provides for an enhanced first-year CCA deduction for certain properties that become available for use before 2028. The Accelerated Investment Incentive will be gradually phased out 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 $1.5 million per taxation year, with some exceptions. Canadian-resident individuals (other than trusts) and Canadian partnerships where all the members are Canadian-controlled private corporations or Canadian-resident individuals (other than trusts) can obtain the same treatment for eligible property acquired after 31 December 2021 that becomes available for use before 1 January 2024 (or 1 January 2025 in the case of an individual or a Canadian partnership where all the members are individuals). 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 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 and carried forward indefinitely; and
- CDE includes 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 and carried forward indefinitely. An enhanced deduction is available for certain CDE incurred after 20 November 2018 and before 2028 (Accelerated CDE). Accelerated CDE incurred prior to 2024 qualifies for an additional deduction of 15 per cent. CDE incurred after 2023 and before 2028 qualifies for an additional deduction of 7.5 per cent.
- Certain corporations carrying out exploration and mining activities in Canada (other than for oil, gas and coal activities) can issue flow-through shares, pursuant to which the tax deductions attributable to certain expenditures incurred (such as 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 (METC) may be available with respect to certain flow-through mining expenditures (generally referred to as 'grassroots exploration' expenses). Many provinces offer parallel credits, as high as 30 per cent in certain circumstances.
- The Critical Mineral Exploration Tax Credit (CMETC) is a 30 per cent federal tax credit for eligible flow-through mining expenditures renounced under flow-through share agreements entered into between 7 April 2022 and 31 March 2027. Among other requirements, eligible expenditures must be exploration expenses that primarily target deposits containing mostly (ie, more than 50 per cent) certain critical minerals (copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium). Expenditures are not permitted to benefit from both the CMETC and METC.
- Contributions made to a qualifying environmental trust used to fund future reclamation are deductible the year they are made (as opposed to reclamation expenses, which are generally recognised at the time reclamation is carried out).
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 has introduced a 5 per cent refundable tax credit for eligible Ontario exploration expenses that are renounced under a flow-through agreement (the Ontario Focused Flow-Through Shares Tax Credit), and provides for a provincial tax exemption of up to C$10 million of profit from a new mine or a major expansion of an existing mine.Tax stabilisation
Does any legislation provide for tax stabilisation or are there tax stabilisation agreements in force?
Canada does not legislate for tax stabilisation, and 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 such assets are 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, and fees for services performed by a non-resident in Canada (other than employment) are subject to a 15 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, non-residents may be subject to land transfer taxes and equivalent duties on the acquisition of mining properties in Canada at higher tax rates than those imposed on Canadian residents.