The government of the Province of Québec announced changes to its mining tax regime on May 6, 2013. This follows months of debate relating to Québec’s mining tax regime and the resulting uncertainty which prevailed in the Québec mining industry.
The announcement indicates that the new regime is based on five core principles:
- All mining corporations must pay royalties. Under the system, all mining operators must pay a minimum royalty referred to as the minimum mining tax.
- Quebecers must benefit more extensively from mining operations. The new regime includes a progressive mining tax on profit designed to allow Quebecers to benefit more extensively from profitable mining operations.
- More jobs in the processing sector. Measures are being adopted to encourage businesses to process ore in Québec.
- More responsible exploitation of mineral resources. A financial guarantee to be provided by mining corporations will cover 100% of the cost of post-mining restoration and the issuance of all mining leases will be subject to obtaining relevant environmental authorizations.
- A more transparent regime. The Mining Act will be amended to include disclosure obligations designed to inform the public of how much tax each operator pays and how much tonnage has been extracted. This information was previously not public.
New mining tax regime
The new regime has two prongs: (1) a minimum mining tax, and (2) a progressive mining tax on profit. Mining corporations must pay the greater of the two amounts.
The minimum mining tax is a royalty paid on the total output value at the mine shaft head for each mine operated by a mining corporation. A royalty of 1% applies on output value of up to $80 million. A royalty of 4% applies to the output value in excess of $80 million. Output value at the mine shaft head is calculated from the gross value of annual output for the mine less operating expenses, general and administrative expenses that relate to this activity, depreciation of certain property used in mining operation activities and a processing allowance. Output value at the mine shaft head can never be less than 10% of the gross value of annual output for the mine.
The portion of the minimum mining tax paid in a year that exceeds the mining tax on profit from that year can be carried forward as a non-refundable minimum mining tax credit to offset the mining tax on profit in future years, to the extent the tax paid in that future year is not less than the minimum mining tax.
The mining tax on profit, as under the existing regime, imposes a tax on the profits of a mining corporation based on the annual output of all its mines. The new measures introduce a progressive rate structure with the rates varying based on profit margin. Profit margin will be calculated by dividing the operator’s profit from all its mines by the gross value of the operator’s output.
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The main changes will apply to fiscal years beginning after December 31, 2013.
New rules to protect the integrity of the mining tax regime
Along with the new mining tax regime, the Mining Act will include rules designed to ensure that incentives such as the depreciation allowance are not abused and that mining taxes are not circumvented. As such, to ensure recapture or terminal loss is realized, an operator ceasing all activities relating to its mining operation for an indeterminate period will be deemed to have disposed of each of its mining properties (of certain prescribed depreciation classes) for proceeds equal to the lesser of the fair market value or the capital cost of such property at such time. A similar deemed disposition will occur where an operator ceases to use (or, in some cases, regularly use) a particular depreciable property in the mining operations.
The new integrity rules will also create a presumption that an operator and an entity with which it is associated are one and the same person under the Mining Act where the operator disposes of processing products from the operation of a mine in Québec, directly or indirectly, in favour of the associated entity in a given fiscal year. The rules will apply if the associated entity would be considered to be an operator had it itself extracted the mineral resources and the Minister of Natural Resources reasonably considers that one of the main reasons for the separate existence of the operator and the associated entity is to reduce mining tax otherwise payable or increase credits applicable to reduce such tax.
Measures to promote the processing of ore
In addition to changes to the mining tax regime, the government is implementing measures to promote the processing of ore in Québec, including the enhancement of the allowance for processing of ore and the introduction of certain supporting initiatives relating to financing of investments and electricity rates.
The processing allowance rate applicable to eligible assets is increased from 7% to 10% for a mine operator engaging solely in concentration operations such as smelting activities and gold and silver refining, and from 13% to 20% for a mine operator engaging in processing operations in Québec such as smelting, refining, metal powder production and billets. The maximum processing allowance will be the greater of 75% of annual earnings from the mine (increased from 55%) and 30% of the operator’s output value at the mine shaft head.
The enhancement complements two important existing tax measures, being the 10-year tax holiday for large investment projects and the investment credit on manufacturing and processing equipment.
In addition, the government has announced that it would contribute to the financing of processing projects by acquiring interests in mineral processing projects through the Capital Mines Hydrocarbures Funds, which has a budget allowance of $750 million.
For mining projects, electricity must normally be charged at marginal cost. The government has indicated that it may grant blocks of electricity at a preferential rate to promote the processing of ore in Québec, noting that it may determine electricity rates in the case of projects involving 50MW or more related to processing activities.
Enhanced environmental protection and more transparent activities
The implementation of the new mining tax regime will be accompanied by measures to better protect the environment and enhance the transparency of mining operations. Such provisions are to be incorporated in the amendments to the Mining Act.
The financial guarantee relating to mine site restoration will be increased from 70% to 100%, and will cover the entire mine site. The guarantee will be provided during the first years of operation (as opposed to over a period of up to 15 years as is currently the case). In addition, additional resources will be devoted to facilitate prompt processing of applications for environmental authorizations.
In Québec, most of the information of a financial and tax nature that the government holds in respect of mining corporations is not public. The amended Mining Act will include provisions pursuant to which the annual mining tax paid by each mining corporation and the tonnage mined will be made public.