Miners Can Maximize Investment Tax Credits By Acting Before Year-End

The 2012 federal budget reduced the scope of certain investment tax credits ("ITCs"), which are dollar-for-dollar reductions in taxes payable (not merely reductions in taxable income) provided for making qualified expenditures. Taxable Canadian corporations that undertake certain mining sector activities relating to qualifying minerals¹ in Canada are entitled to claim an ITC equal to 10% of the amount of qualifying expenditures. Qualifying expenditures are those included in the taxpayer's pool of Canadian exploration expenses (CEE) by virtue of being incurred, before the mine is producing in reasonable commercial quantities, on

1. "grass roots" exploration to determine the existence, location, extent or quality of a qualifying mineral deposit in Canada (exploration expenses); or
2. 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 (i.e., a reduction in tax payable) equal to 10% of the pool balance for the year.

As a result of the 2012 federal budget, the preproduction mining expenditures ITC will be phased out. The current 10% ITC will continue to apply for preproduction exploration mining expenditures (i.e., those described in (1)) incurred in 2012, with the ITC rate dropping to 5% for expenditures incurred in 2013 (and eliminated for subsequent years).² It will therefore be advantageous for Canadian mining companies making such expenditures to incur them before the end of 2012, in order to get the higher 10% ITC rate. Affected taxpayers should consider accelerating the timing of such expenditures if possible, to maximize the tax benefit.

Footnotes

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 pre-production development expenditures (i.e., described in (2) above), the 10% rate continues to apply for qualifying expenditures made before 2014, with a phased-out reduction in later years, subject to limited grandfathering.

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