Canada: Québec Government Proposes A New Mining Tax Regime

On May 6, 2013, the provincial Minister of Finance released a proposal for a new Québec mining tax regime (the "Regime") which would replace the current framework enacted under the Mining Tax Act on June 6, 2011.

The Regime supplements the federal and provincial income tax system, but the mining tax under the Regime is deductible for income tax purposes.

Background and existing regime

In 2011, GDP related to mining operations in Québec amounted to $2.9 billion, which represents 1.0% of Québec's total GDP. The existing mining tax regime in Québec currently provides for a 16% fixed royalty on profits calculated on a 'mine-by-mine' basis, which means that a loss on one mine cannot be used to reduce the profits generated by another mine.

Following the latest Québec elections in September 2012, the new Parti Québecois minority government (the "Government") consulted the mining industry and the general public as to reforming the Québec mining tax regime, most notably during the Forum sur les redevances minières du Québec held on March 15, 2013.

The proposed new Regime, if implemented, will result in material changes to the taxation of mining operations in Québec. Most notably, it would increase the overall royalties payable by an operator with mining activities based in Québec (an "Operator") while providing for additional measures to foster and promote further mining and processing investment in the province.

Overview of the proposed tax changes

Under the new Regime, every Operator will be required to pay the greater of the two following royalty amounts:

  • A minimum fixed royalty: this minimum mining tax will be calculated based on 1% for the first $80 million of annual output value at the mine shaft head for all the mines an Operator operates; and 4% for the output value in excess of $80 million. Significantly, this minimum mining tax will be levied whether or not the subject mining activities generate a profit.

    As an example, the effective cumulative tax rate for an Operator that generates $100 million of annual output value would be 1.6%.

    The output value at the mine shaft head is calculated as the gross value of annual output for the mine, less expenses incurred to achieve the gross value of annual output (e.g. grinding, processing, transportation and storage, marketing of the mineral substance), general administrative expenses, depreciation allowances for property used in mining operation activities, and a processing allowance. The deductible expenses do not include financing costs. The output value at the mine shaft head may not be less than 10% of the gross value of annual output for the mine for the applicable fiscal year.

    The Government is also proposing that the minimum mining tax paid for a fiscal year may be carried forward and applied against the mining tax on future profit (described below) as a non-refundable tax credit. However, the use of amounts carried forward will be limited each year so that an Operator will always pay an amount of mining tax on profit equivalent to the minimum mining tax applicable for that fiscal year.
  • A progressive royalty tied to profit margins: by replacing the current fixed royalty rate of 16%, the new Regime will implement progressive rates based on an Operator's profit margin. Note that 16% will be the minimum royalty rate, with the rate increasing as the profit margin increases. An Operator's profit margin is calculated by dividing its mining profit by the total of the gross value of annual output for all the mines it operates during the applicable fiscal year.

    Operators will pay a royalty of 16% for the profit margin between 0% and 35%; 22% for the segment of the profit margin in excess of 35%, up to 50%; and 28% for the profit margin in excess of 50%, up to 100%.

Accordingly, the effective cumulative royalty rate will be, as an example, 16% for an Operator whose profit margin does not exceed 35%; 17.1% for an Operator whose profit margin is 42.5%; 17.8% for an Operator whose profit margin is 50%; 21.2% for an Operator whose profit margin is 75%; and 22.9% for an Operator whose profit margin is 100%.

The Government is also proposing additional measures to foster and promote further investment in mining and processing activities in Québec:

  • Increased incentives for ore processing in Québec: the processing allowance, which reduces taxable mining profit by applying a rate of return on the capital cost of eligible assets will be increased. Three rates will be used for the calculation of the processing allowance an Operator may deduct:

    With regards to Operators engaging solely in concentration operations (including smelting and refining of ore from a gold or silver mine), the rate of the allowance applicable to eligible assets in Québec will be increased from 7% to 10%.

    With regards to Operators engaging in processing operations (including smelting or refining of ore, other than ore from a gold or silver mine) the rate of allowance applicable to eligible assets will be 13% for smelting or refining activities carried on outside of Québec, and 20% for smelting or refining activities in Québec.

    The maximum processing allowance that an Operator may deduct, may not exceed the greater of (a) 75% of its annual earnings from the mine for the applicable fiscal year, before deducting certain allowances (including the processing allowance, the additional depreciation allowance, the additional allowance for a "northern mine" and the additional allowance for a mine situated in "Northern Québec"), and (b) 30% of its output value at the mine shaft head for the applicable fiscal year, before deducting the processing allowance.
  • Financing of investments and electricity rates: the Government has also proposed additional measures to facilitate investment under the new Regime.

    Capital Mines Hydrocarbures Fund: the Government has proposed a $750 million fund in the 2013-2014 Budget, $500 million of which the Government is proposing to invest in equity interests in Operators mining mineral substances located in Northern Québec, understood as the territory north of 50°30' north latitude.

    Preferential electricity rates: the Government may grant blocks of electricity at a preferential rate to Operators with ore processing activities consuming 50 MW or more.

These proposed incentives would complement two existing tax measures: the 10 year tax holiday for large investment projects; and the investment tax credit on manufacturing and processing equipment.

Public disclosure of mining tax

The documents released by the Government on May 6, 2013, also propose, among other things, measures for enhanced environmental protection, public acceptance and greater transparency of mining operations. Specifically, the future legislation would include provisions requiring that:

  • the annual mining tax paid by each Operator would be made public;
  • information on the tonnage of ore mined would also be made public.

Next steps

The proposed Regime is the result of the public consultation process held in March 2013 mentioned above. In order to have the force of law, the Regime must next be tabled in a legislative bill and passed by the National Assembly of Québec. The minority Government has expressed its intention that the new Regime be effective as of 2014, but the specific provisions discussed above will remain subject to on-going debate until such time.

Further Reading:

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.

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