Canada: New Québec Mining Tax Regime

After nearly eight months of uncertainty, the Québec government finally unveiled its new mining tax regime during a press conference held on May 6, 2013. The new regime will come into force in January 2014.

A preliminary review of the new regime demonstrates that the government has proven receptive to the concerns expressed by the mining industry, which has been suffering from a decrease in metal prices and a drop in investments over the last two years. In fact, stakeholders in the Québec mining industry have been leading an active campaign to raise public awareness regarding the negative impacts that a significant hike in mining royalties would have on the industry and on Québec’s economy.

The new tax hikes are more favourable to mining companies than the tax increase originally contemplated by Québec’s Minister of Natural Resources, Martine Ouellet. The May 6 press conference was held jointly by Ms. Ouellet and the Minister of Finance, Nicolas Marceau. During his speech, Mr. Marceau acknowledged the change in circumstances and the new difficulties facing the mining industry, including the decrease in metal prices. In addition, he stressed that he had no intention to harm investments by opting for an approach that would be too demanding on stakeholders. These factors may explain why the government revised its strategy and adopted tax hike rules not as harsh as those initially announced by Ms. Ouellet.

The current mining tax regime applicable in Québec functions solely on the basis of profits: there is a single tax rate of 16 % applicable to profits generated by a mining company. Under the current regime, no tax is due if the mine is not profitable.

However, under the new mining tax regime announced on May 6, all mining companies will be required to pay a minimum tax, even in the absence of profits.

The new mining tax regime is a hybrid one. A mining company will be required to pay the greater of the following two amounts: (1) a minimum mining tax regardless of the existence of profits; or (2) a progressive mining tax on profits.

1. The minimum mining tax

The minimum mining tax is to be calculated as follows: a 1 % tax for the first $80-million on the output value at the mine shaft head (“OVMSH”) and a 4 % tax on any amount exceeding $80-million. The OVMSH is derived by taking the gross value of the minerals extracted and deducting from it certain eligible expenses and allowances, including certain expenses related to extraction and marketing activities.

2. The progressive mining tax on profit

As for the progressive mining tax on profit, it is to be calculated based on the mining company’s profit margin and implemented at progressive rates, which are listed in the table below. The details and the actual basis of such calculation will need to be confirmed when the legislation implementing the tax change is applied.

The tax to be paid = the greater of  :

^{(1)  OVMSH = output value at the mine shaft head, which is derived by taking the gross value of the minerals extracted and deducting from it certain eligible expenses and allowances.}

^{(2)  Profit Margin = Mining company’s profit divided by the gross value of its annual production.}

^{(3)  Effective rates at the top of the segment. The nominal applicable rates are, respectively, 16%, 22% and 28% (Source: Gouvernement du Québec).}

In order to encourage mineral processing jobs in Québec, the new regime also provides for an increase in incentives offered for processing of minerals in Québec. 

Overall, the proposed changes to Québec’s mining tax regime have taken into account the arguments and concerns of the industry, and especially those of junior miners, which constitute the majority of Québec’s mining exploration firms. Although the rate hikes were not as harsh as feared by the industry, they will need to be meticulously addressed by tax advisers in order for their impacts to be as manageable as possible for mining companies. 

The government’s press release is available at the following link: http://www.finances.gouv.qc.ca/documents/Communiques/en/COMEN_20130506.pdf

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