Much of the economic potential of Canada's North lies
beneath the ground, in the form of vast natural resources.
Discovering and developing these resources in some of the
world's most challenging terrain is a daunting undertaking,
requiring considerable investment of time, capital and expertise.
Exploring for and developing natural resources is a risky activity
where success often occurs (if at all) after many failures, and the
costs involved (especially in Canada's North) make financing
this high-risk activity very difficult.
For many years the income tax system has provided a valuable
incentive to Canadian mining companies engaged in what is commonly
referred to as "pre-production mining" activities.
Qualifying expenditures made by a company on these activities
entitle it to an "investment tax credit" or
"ITC", which is very valuable because each dollar of ITC
reduces the amount of the company's income tax payable by $1.
Thus, unlike an expenditure that is simply deductible in computing
income (where $1 of expense saves perhaps 25 or 30 cents of tax,
depending on the company's applicable tax rate), ITCs reduce
taxes owing dollar for dollar.
The pre-production mining expenditure ITC applies to qualifying
expenditures made in Canada by a taxable Canadian corporation on
activities relating to "qualifying minerals," which
Base or precious metal deposits; and
Industrial minerals that (when refined) result in a base or
Qualifying expenditures are those included in the taxpayer's
pool of Canadian exploration expenses by virtue of being incurred
(before the mine is producing in reasonable commercial quantities)
"Grass roots" exploration to determine the existence,
location, extent or quality of a mineral deposit in Canada
(exploration expenses); or
Activities undertaken in order to bring a new mine in Canada
into production (development expenses).
Expenditures on these activities ("pre-production
expenses") are added to a pool, and the corporation is
entitled to claim an ITC equal to 10 percent of the pool balance
for the year.
Unfortunately, in the March 29, 2012 Budget, the federal
government announced the elimination of the pre-production mining
expenditure ITC. For preproduction exploration
expenditures, the ITC will continue to apply at the 10 percent rate
for expenditures incurred in 2012, with the ITC rate dropping to 5
percent for expenditures incurred in 2013 and no ITC for
expenditures in subsequent years.
For pre-production development expenses, the 10
percent rate would apply for expenditures incurred in 2012 and
2013, dropping to 7 percent for expenditures incurred in 2014, 4
percent for expenditures incurred in 2015, and no ITC in subsequent
years. Transitional relief would be provided by maintaining the 10
percent rate for pre-production development expenditures incurred
before 2016 under a written agreement entered into before March 29,
2012, or as part 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. For this purpose, activities such
as obtaining permits or regulatory approvals, conducting
environmental assessments, community consultations or impact
benefit studies, and similar activities will not be considered
construction or engineering and design work.
Elimination of the pre-production mining expenditure ITC is
disappointing, particularly at a time when commodity prices are
falling and funding for exploration and development becomes harder
to find for mining companies. More expensive projects such as many
of those in Canada's North will likely be the first to suffer,
as the loss of this important ITC considerably reduces the economic
incentive for mid-tier and senior mining companies to conduct the
sort of high-risk exploration and pre-production development
activity that is needed to unlock the resources buried north of the
60th parallel. Economic development of the North is one of the key
elements of Canada's Northern Strategy, and foregoing tax
revenues today to assist in the discovery of new resources that
will generate taxes for many years in the future would be a wise
investment. In the meantime, mining companies and their partners in
Canada's North should ensure that qualifying expenditures are
incurred as quickly as necessary in order to obtain the maximum ITC
during the phase-out period.
Originally published in BLG's Team North Newsletter,
Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
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