The 2013 federal budget continues the trend of removing income tax incentives for Canadian mining companies. In particular, the budget proposes to reduce the deductions available to mining companies in respect of expenses incurred in developing or expanding mines.
The first proposal relates to certain pre-production mine development expenses. Under the existing rules such development expenses are classified as “Canadian exploration expenses” (CEE) that qualify for a 100% deduction (notably, this does not include an expense that is the cost of depreciable property). Under the proposed rules these development expenses will be classified as “Canadian development expenses” (CDE) that qualify for only a 30% deduction (on a declining-balance basis). The proposal will be completely phased in after the year 2017.
The second proposal relates to the depreciation rate applicable to mining assets. Under the existing rules certain depreciable mining assets acquired in respect of a new mine (or a major expansion of a mine) qualify for an accelerated capital cost allowance (ACCA) of up to 100%. Under the proposed rules the ACCA will be eliminated with the effect that most depreciable mining assets will qualify for the standard 25% depreciation rate (on a declining-balance basis). The proposal will be completely phased in after the year 2020.
These proposals will apply to expenses incurred on or after budget day (March 21, 2013). However, the existing rules will continue to apply in respect of expenses incurred after budget day in certain limited circumstances provided that the expenses are incurred before 2017 for CEE and before 2018 for ACCA. This transitional relief will be available where the expenses are incurred under a written agreement entered into prior to budget day, or where mine construction (or engineering and design work for construction as evidenced in writing) was started before budget day. Consequently, the proposals may not impact mine construction that is currently underway, provided that commercial production begins before 2017.
The stated purpose of these proposals is to “better align the deductions available for expenses in the mining sector with those available in the oil and gas sector”, and to “rationalize and phase out over the medium-term inefficient fossil fuel subsidies”. These announcements continue the trend set in last year’s budget where the government announced the phase out of the 10% investment tax credit relating to “pre-production mining expenditures” along with the phase out of the 10% “Atlantic investment tax credit”.
On a positive note, mining companies could benefit from the measures aimed at increasing the supply of skilled labour (such as the proposed creation of the Canada Job Grant). Also, the budget provides for the extension of the 15% “mineral exploration tax credit” available to individuals who invest in flow-through shares.