Canada: Mining & The 2012 Federal Budget

Last Updated: April 18 2012
Article by Steve Suarez

Most Read Contributor in Canada, September 2016

The 2012 federal budget (Budget) was presented by Canada's Finance Minister Jim Flaherty in the House of Commons on March 29, 2012. The Budget proposes a number of tax initiatives of importance to the mining community.



Certain mining sector activities relating to qualifying minerals undertaken in Canada by taxable Canadian corporations entitle those corporations to an investment tax credit (ITC) equal to 10% of the amount of qualifying expenditures.1 Qualifying expenditures are those included in the taxpayer's pool of "Canadian exploration expenses" (CEE) by virtue of being incurred on (1) "grass roots" exploration to determine the existence, location, extent or quality of a mineral deposit in Canada (exploration expenses), or (2) activities undertaken in order to bring a new mine in Canada into production (development expenses), in each case incurred before the mine is producing in reasonable commercial quantities. Expenditures on these activities ("pre-production expenses") are added to a pool, and the corporation is entitled to claim an ITC (i.e., a reduction in tax payable) equal to 10% of the pool balance for the year.

The Budget announces the elimination of the pre-production mining expenditure ITC. For pre-production exploration expenditures, the credit will continue to apply at the 10% rate for expenditures incurred in 2012, with the rate dropping to 5% for expenditures incurred in 2013 and no ITC for expenditures in subsequent years. For pre-production development expenditures, the 10% rate will apply for expenditures incurred in 2012 and 2013, dropping to 7% for expenditures incurred in 2014, 4% for expenditures incurred in 2015 and no ITC in subsequent years. Transitional relief is provided for pre-production development expenditures by maintaining the 10% rate for such expenditures incurred before 2016 under a written agreement entered into before March 29, 2012 or as part of the development of a new mine the construction of which (or the engineering and design work for the construction of which) had commenced before March 29, 2012.2


The Atlantic investment tax credit offers a 10% ITC for expenditures on property used in certain activities occurring in Atlantic Canada (Prince Edward Island, Nova Scotia, New Brunswick, Newfoundland and Labrador, the Gaspe Peninsula or a prescribed offshore region). The Budget will phase out this ITC for expenditures incurred on mining and oil and gas activities (expenditures on other activities are unaffected). The 10% ITC rate will apply for expenditures on qualifying property acquired before 2014, with a reduction to a 5% rate for property acquired in 2014-2015, and no ITC thereafter. The 10% rate will be maintained for qualifying expenditures incurred before 2017 under a written agreement entered into before March 29, 2012 or as part of a project phase the construction of which (or the engineering and design work for the construction of which) had started by March 29, 2012.3 For this purpose, a "project phase" means a discrete expansion in the extraction, processing or production capacity of a project beyond that existing on March 29, 2012, and which expansion was the taxpayer's demonstrated intention immediately before that date. The elimination of this ITC is unfortunate, as it takes away an important incentive for conducting high-risk exploration activities.


Individuals (other than trusts) who invest in flow-through shares may be entitled to additional tax benefits above and beyond the renounced exploration expenses available on all flow-through shares.4 When certain qualifying expenditures (essentially expenses incurred in mining exploration above or at ground level conducted in Canada) are incurred and renounced to a holder of flow-through shares that is an individual (other than a trust), that holder is entitled to an investment tax credit equal to 15% of the renounced qualifying expenditures. This tax credit on "grass-roots" surface exploration expenditures is called the "mineral exploration tax credit."

The Income Tax Act (Canada) currently requires that qualifying expenditures must be incurred by the corporation by the end of 2012 and renounced to the investor under an agreement made before April 2012.The Budget proposes to extend the 15% mineral exploration tax credit for another year, by extending (1) the date for incurring qualifying expenditures to the end of 2013, and (2) the deadline for the corporation and the investor to enter into the flow-through share subscription agreement governing renunciation to March 31, 2013.


Thin Capitalization

Canadian corporations are limited in the amount of interest expense they can deduct for tax purposes on debt owing to non-residents of Canada who are (or are related to) significant shareholders of the Canadian corporation, e.g., a foreign parent of a Canadian subsidiary. Pre-Budget the amount of such debt that was interest-deductible for tax purposes was limited to $2 for every $1 of equity.5 The Budget reduces this limit to $1.5 of debt for every $1 of equity (effective for taxation years beginning after 2012), and extends this rule to debt owing by a partnership of which a Canadian corporation is a member.


The Budget also introduces new anti-avoidance measures directed at the use of partnerships, which are common in the mining sector. First, the Budget extends an existing rule dealing with the sale of interests in a partnership to a tax-exempt entity. This new rule will now also apply to sales of a partnership interest to a non-resident of Canada (unless the partnership is using all or substantially all of its property in a business carried on at a permanent establishment in Canada), effective to sales occurring after March 28, 2012.6 Where this new rule applies, the seller will not compute its taxable capital gain simply as 50% of the difference between the sale price and the adjusted cost base of the partnership interest, as is usually the case. Instead, the capital gain will be computed by effectively looking through the partnership interest to the partnership's property, so that the seller's gain will be:

  • 50% of the portion of the gain attributable to gains in the value of non-depreciable capital property (e.g., land that is not a natural resource property, and shares of corporations); and
  • 100% of the portion of the gain attributable to other property, e.g., depreciable property, Canadian and foreign resource property, most intangibles and inventory (collectively, "income property").

In addition, an analogous rule is being added to the rules governing the s. 88(1)(d) bump, a provision that applies where one Canadian corporation (the subsidiary) is wound up into or merged with another Canadian corporation (the parent) that owns all the shares of the subsidiary, and allows the parent to increase the cost for tax purposes of the subsidiary's non-depreciable capital property. Instead of being permitted to increase the cost for tax purposes of a partnership interest owned by the subsidiary up to an amount equal to its fair market value, no increase will be permitted to the extent that the accrued gain on the partnership interest is attributable to Canadian or foreign resource property or to accrued gains on other income property. This rule is very broad, as it does not distinguish between partnerships created for business reasons and those created for tax planning purposes. It applies to mergers and wind-ups occurring after March 28, 2012.7

Foreign Affiliate Dumping

For some time the Department of Finance had been concerned that Canadian subsidiaries of foreign companies could inappropriately generate tax-deductible interest expense by incurring debt to purchase shares of sister companies in other countries. The Budget has proposed a very broad rule which goes beyond this concern. It applies whenever a Canadian corporation (Canco) that is controlled by a non-resident corporation (Parent) makes an investment in another non-resident corporation (Forco), if immediately thereafter Forco is (or as part of the series of transactions that includes the investment becomes) a "foreign affiliate" of Canco, unless it is reasonable to conclude that the investment was made for reasons other than to obtain a tax benefit (i.e., for business purposes).8 Where the rule applies:

  • Canco is deemed to have paid a dividend to Parent equal to the value of any property (other than Canco shares) transferred by Canco or any obligation assumed by Canco in respect of the investment; and
  • no amount is to be added to the paid-up capital (PUC) of any Canco shares as a result of Canco having made the investment, i.e., to the extent that Canco pays using shares of itself, the value received in exchange is not included in the PUC of the Canco shares issued. Since PUC is a key component of "equity" under the thin capitalization debt/equity test, this result effectively limits a Canadian subsidiary's ability to create more PUC (and thereby increase its maximum potential tax-deductible intra-group debt) by acquiring foreign group members in exchange for issuing shares of the Canadian subsidiary.9

An "investment" is defined very broadly, and can include the purchase of shares of Forco from an arm's-length seller or a direct subscription for shares in (or contribution of capital to) Forco by Canco. The scope of this rule is very broad indeed, and foreign mining companies with Candian subsidiaries will need to consider it carefully when transferring any property (including issuing shares) or incurring any obligation that relates to a foreign affiliate. The Department of Finance is soliciting submissions from the tax community on the scope of the "business purpose" test exception to this new rule.


1 Qualifying minerals are diamonds, base or precious metal deposits, or industrial minerals in Canada that produce base or precious metals when refined.

2 For this purpose "construction" and "engineering and design work" does not include obtaining permits or regulatory approvals, conducting environmental assessments, community consultations or impact benefit studies, and similar activities.

3 See note 2.

4 For more on the taxation of flow-through shares see

5 For this purpose, "equity" means the sum of the Canadian corporation's retained earnings, plus the paid-up capital of any shares of the Canadian corporation owned by non-residents who own 25% or more of the corporation's shares (by votes or value).

6 The coming into force rule exempts a disposition of a partnership interest occurring after March 28, 2012 if the disposition was (1) made to a person dealing at arm's length with the vendor, (2) completed before the end of 2012 and (3) the subject of a binding written agreement entered into before March 29, 2012.

7 Except where the parent acquired control of the subsidiary before (or was legally obligated to do so pursuant to a written agreement entered into before) March 29, 2012, and had before that date evidenced in writing its intention to merge or wind up the subsidiary. Any such merger must be completed before 2013, or in the case of a wind-up be initiated before 2013.

8 In general terms, a foreign corporation is a "foreign affiliate" of a Canadian taxpayer if the Canadian taxpayer owns (directly or indirectly), alone or together with related persons, 10% or more of any class of the foreign corporation's shares. "Foreign affiliate" status is necessary in order for dividends received by a Canadian corporation from a foreign corporation to be eligible for exemption from Canadian taxation.

9 Similar rules are proposed to prevent contributed surplus (which is also included in "equity" for thin capitalization purposes) from being created on a contribution of foreign group member shares to Canco for no consideration, viz., a capital contribution.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.