Mining Taxation in Canada

For the most part, Canada’s mining tax system is internationally competitive. There are tax incentives in place to encourage multinational mining companies to establish a presence here. Such incentives help spur exploration and ease the burden of financing investments that may not see profit for decades; however, the Canadian tax system is not without criticism.

Mining taxation in Canada isn’t easy to understand. This is partly because each province and territory imposes its own tax system, which can vary significantly. Additionally, a subject of persistent criticism is that the federal, provincial and territorial governments are increasingly relying on non-profit based taxes as sources of revenue, such as payroll taxes, property taxes and user fees. Because the producer is a price-taker, these costs cannot be passed onto the customer and, therefore, must be paid by the mining company.

This begs the question, how can mining companies reap the most reward from such a complex tax system? One solution is to ensure available tax incentives are easy to identify and obtain. There are some “low-hanging fruit” that mining companies should consider to help ease the burden of the significant upfront investments required to construct a mine.

While many mining companies are enjoying a profitable year, there is limited understanding by the general population about the heavy cost burden they bear.

In addition to 16.5% in federal income tax and provincial/territorial income tax rates that vary from 10 to 15%, mining companies pay an array of costs in addition to traditional income taxes that significantly increase their construction and operating costs. This includes royalty or licensing fees payable to the government, contributions to public infrastructure, such as roads, schools and housing, as well as offering employees higher wages and benefits that, in turn, create jobs in remote areas.

As an acknowledgement to the cost intensive nature of mining, fast write-offs of capital expenditures exist to help Canadian mining companies first recoup their cost of investment before having to pay taxes on the profit they earn. For instance, the Capital Cost Allowance (CCA) rules on depreciable mining assets acquired before production begins, or acquired in respect of major expansions, allows a company to deduct an amount of CCA on such assets up to the income generated by the associated mine. Another example is the Canadian Exploration Expense (CEE), which consists of virtually all Canadian exploration and pre-production development expenses incurred by a company. Such expenses can be deducted in full, up to the income generated from the mine.

Mining companies in Canada can also take advantage of Flow-Through Shares (FTS). The purpose of FTS is to encourage investment in companies that are undertaking high-risk exploration, where often a decade or more passes before commercial production can begin. This system has proven successful in spurring Canadian exploration, including the flourishing diamond mining industry.

The FTS regime allows companies to transfer or “renounce” certain Canadian exploration and development expenses that they could otherwise claim to shareholders, who can then claim the deductions as if they incurred the expenses directly. For certain “greenfield” expenses, additional non-refundable investment tax credits are also made available to shareholders. This gives shareholders a tax benefit, making the shares more attractive as an investment and allowing mining companies to raise capital more easily.

Although the Canadian mining tax system has been fairly competitive for years, mining companies are highly susceptible to increased tax rates and fees as governments look to fund deficits. From time to time, the industry is also scrutinized as benefitting unfairly from tax incentives not available to other industry sectors. However, both these issues are in part due to misunderstandings about the significant costs mining companies carry before any return is received from their investment, and the often underestimated risk of little or no return. To provide more clarity to a wide array of stakeholders, mining companies should ensure they are publishing their total tax contributions to the communities where they operate.

Developing a mine is both labour and cost intensive, requiring a huge commitment for the life of the project. A stable mining tax regime is crucial to encourage exploration and, fortunately, Canada’s has been stable for many years. Moreover, Canadian mining companies can also take advantage of tax incentives and strategies to ease some of the financial burdens associated with developing a mine before its profitable production years.

For more information or to download the 2011 Canadian Mining Taxation report, visit: www.pwc.com/ca/en/mining/canadian-miningtaxation.jhtml