Canada: Major Changes To Québec’s Mining Tax Regime

Last Updated: May 22 2013
Article by Marie-Soleil Landry, Christian Meighen and Ryan Rabinovitch

Most Read Contributor in Canada, September 2018

Following several months of uncertainty since the announcement of modifications to the Québec mining tax regime, the Québec Minister of Finance and the Economy, Nicolas Marceau, together with the Québec Minister of Natural Resources, Martine Ouellet, have finally announced the amendments that they propose to make to the Mining Tax Act.

An information bulletin released on May 6, 2013 (Information Bulletin) describes the amendments. The Information Bulletin sets out a series of changes to the current regime, which essentially imposes a 16% tax on an operator's annual profit. Under the new rules, the mining duties that an operator will be required to pay will correspond to the greater of (1) a "minimum mining tax" for a given fiscal year or (2) a mining tax based on the operator's profit for the year. The Information Bulletin also introduces certain other measures, including changes to the existing rules governing an operator's processing allowance, the depreciation allowance and transactions between associated operators.

Background

During the last election campaign, the current government promised to change Québec's mining tax regime to a system similar to that which is applicable in Australia. This promise entailed a 5% royalty on the value of ore extracted from a mine (a so-called "ad valorem" regime) as well as an additional 30% royalty on profits in excess of an 8% return on contributed capital. Following the election, industry spokespersons, firms specializing in mining taxation, chambers of commerce and local communities lobbied the government of Québec, for the most part indicating that such a significant increase in the fiscal burden associated with the mining tax could significantly undermine investment and employment in the Québec mining sector. As a result, the Québec Minister of Natural Resources indicated that the government was open to discussing the new regime prior to its enactment. The Forum on Mining Royalties followed on March 15 and 16, 2013, and allowed stakeholders in the Québec mining sector to share their views on the proposed reform. The Information Bulletin represents the government's response to those views.

The Minimum Mining Tax Regime

For fiscal years starting after December 31, 2013, the minimum mining tax of an operator will be equal to the total of (1) 1% of the lesser of (a) all amounts each of which is the operator's "output value at the mine shaft head" in respect of a mine, and (b) the operator's "reduced-rate taxable amount", and (2) 4% of the amount by which the aggregate output value at the mine shaft head for each of the operator's mines exceeds the operator's reduced-rate taxable amount.

The "output value at the mine shaft head" in respect of a mine will essentially be defined as the portion of an operator's "gross value of annual output" that may reasonably be attributed to the operation of the mine, minus certain deductions designed to arrive at the value of the minerals extracted from the mine before they have been processed. The output value at a mine shaft head must in no case be less than 10% of the operator's gross value of annual output from the mine.

The deductions that an operator will be entitled to claim in determining its output value at the mine shaft head will include all expenses incurred for the fiscal year in respect of the mine and that are reasonably attributable to crushing, grinding, sieving, processing, handling, transportation or storage of the mineral substance from the mine at its first accumulation site after it is removed from the mine, as well as certain expenses related to marketing activities, including general administrative expenses in relation to such activities. An operator will also be entitled to deduct a depreciation allowance in respect of certain property used in post-extraction operations, and a processing allowance similar to the one currently provided for in the Mining Tax Act (see sections entitled "Depreciation Rules" and "The Enhanced Processing Allowance" below).

The "reduced-rate taxable amount of an operator" for the purposes of calculating an operator's minimum mining tax will be $80M unless the operator is associated with one or more other operators. In that case, the $80M threshold will have to be shared by each associated operator in the manner specified in a agreement filed with the operator's annual mining tax return.

Amendments to the Mining Tax on Annual Profit

The current 16% tax rate that is applicable in calculating the mining tax on an operator's annual profit will be replaced by progressive tax rates based on an operator's profit margin for a given fiscal year.

Under the new rules, the operator's annual profit for the fiscal year will be allocated between different segments of profit margin, and the amount of annual profit for each segment of profit margin will be multiplied by 16% for the first segment, 22% for the second segment and 28% for the third segment. The first segment of an operator's profit margin will represent the portion of an operator's annual profit that is less than or equal to a 35% profit margin, the second segment will correspond to the portion exceeding 35% but not exceeding 50%, and the last segment will correspond to the portion that exceeds 50%. For the purposes of these rules, an operator's profit margin will consist of the proportion that the operator's annual profit is of the gross value of the annual output from each of the operator's mines.

The calculation of an operator's annual earnings from a mine will also be changed somewhat. An operator's processing allowance will be increased, and the rules relating to the computation of an operator's depreciation allowance (including the recapture of depreciation previously claimed) will be modified (see sections entitled "Depreciation Rules" and "The Enhanced Processing Allowance" below). The other rules currently applicable to the calculation of an operator's annual earnings from a mine and annual profit for a fiscal year will remained unchanged.

Depreciation Rules

As mentioned above, an operator will be permitted to claim a depreciation allowance in computing its output value at the mine shaft head in respect of its mines. Such allowance will be limited to property used in mining operation activities "from the first accumulation site of the mineral substance after it is removed from the mine". This expression will be defined to mean a processing asset or any other property used entirely or almost entirely for crushing, grinding, sieving, handling, transportation or storage of the mineral substance from its first accumulation site after it is removed from the mine, and, if applicable, the processing products obtained. All such properties will be carved out of the existing classes of depreciable property set out in the Mining Tax Act (i.e. classes 1, 2, 3 and 4) and placed in new classes (i.e. classes 1A, 2A, 3A and 4A).

The depreciation allowance relating to class 1A, class 2A and class 3A property will be computed on a straight-line basis at a rate of 15%, 30% and 100%, respectively, of the capital cost of the property. The depreciation allowance for class 4A property will be computed at a rate of 30% on a declining balance basis. An operator will not be entitled to claim a deduction in respect of class 4A property until the undepreciated capital cost of the operator's class 1A, 2A and 3A property has been reduced to nil.

The new classes will also apply for the purposes of the depreciation allowance used to compute an operator's annual profit. The Information Bulletin specifies, however, that no amount will be deductible in calculating an operator's annual earnings from a mine if it has not been deducted in the calculation of the output value at the mine shaft head in respect of the mine.

The Enhanced Processing Allowance

Under the new rules, the amount of the processing allowance that an operator may deduct in calculating its annual earnings from a mine it operates may not exceed the lesser of (1) the amount in respect of an asset used in processing ore from a mine (i.e., a "processing asset" under the Mining Tax Act) generally determined by multiplying the capital cost of the asset by one of the applicable rates discussed below, and (2) an amount corresponding to the greater of (a) 75% (increased from the current 55%) of the operator's annual earnings from the mine, determined without taking into account the processing allowance and certain other deductions, or (b) 30% of the operator's output value at the mine shaft head in respect of the mine, determined without taking the processing allowance into account.

The applicable rates for computing the processing allowance have been increased. Very generally, they will be equal to 10% where the operator does not carry out smelting or refining activities (or carries out smelting or refining activities in respect of gold or silver), 13% where the operator carries out smelting or refining (other than the smelting or refining of gold or silver) exclusively outside of Québec, and 20% where the operator carries out smelting or refining (other than the smelting or refining of gold or silver) in Québec.

Consequences Related to the Termination of Mining Operations or Where a Property Ceases to Be Used

The Mining Tax Act will be amended so that where a person or a partnership ceases all activities relating to its mining operation for an indeterminate period, it will be deemed to have alienated, at the time immediately before the time immediately before it ceases such activities, each of its class 1, class 2, class 3, class 4, class 1A, class 2A, class 3A and class 4A properties for proceeds of alienation equal to the lesser of the fair market value of such property at the time of the alienation or the capital cost of such property at such time. Similar amendments will be made so that an operator that ceases, at a particular time, to use class 1, class 2, class 1A or class 2A property, or to regularly use class 3, class 3A, class 4 or class 4A property in its mining operation, will be deemed to have alienated such property, at such time, for proceeds of alienation equal to the lesser of the fair market value of such property at such time or the capital cost of such property at such time.

Presumption That an Operator and an Associated Entity are One and the Same

According to the Information Bulletin, a new anti-avoidance rule will be introduced into the Mining Tax Act. The rule will provide that where (1) an operator alienates, directly or indirectly, in favour of an entity with which it is associated, all or part of the mineral substances or processing products from the operation of a mine in Québec, (2) such associated entity would be considered to be carrying out mining operation work regarding such mineral substances and, if applicable, such processing products if it had itself extracted the mineral resources from Québec soil and, (3) in the view of the Minister of Natural Resources, it is reasonable to consider that one of the main reasons for the separate existence of the operator and the associated entity, during such fiscal year, is to reduce the amount of mining duties that would otherwise be payable or to increase a credit on duties refundable for losses or non-refundable credit on account of the minimum mining tax, the operator and such associated entity will be deemed to be one and the same person.

Reduction of an Operator's Adjusted Annual Loss

Given that the processing allowance has been increased, as described above, corresponding adjustments will be made to the formula used to compute an operator's "adjusted annual loss". An operator's adjusted annual loss will correspond to the excess of the operator's annual loss, for the fiscal year, over the lesser of (1) the amount of the processing allowance the operator could claim, for the fiscal year, if such allowance was calculated solely on the basis of the limit based on the capital cost of each property that was a processing asset using the new rates described in the Information Bulletin, and (2) the amount of the operator's annual loss, for such fiscal year, multiplied by a rate of 75% (up from the current 55%).

Non-Refundable Credit on Account of the Minimum Mining Tax

Payments made by an operator on account of the minimum mining tax will give rise to a non-refundable credit that may be claimed by the operator in a future fiscal year where it is required to pay mining duties corresponding to its mining tax on its annual profit. The excess, if any, of the operator's minimum mining tax for a fiscal year over the mining tax on the operator's annual profit for such fiscal year will be added to the operator's "cumulative balance on account of the operator's minimum tax" and each amount in respect of non-refundable credit on account of the minimum mining tax deducted by the operator of for a fiscal year ended before such time will be deducted from such cumulative balance. In a fiscal year where an operator is required to pay mining duties corresponding to its mining tax on its annual profit, it will be entitled to claim a non-refundable credit on account of the minimum mining tax that corresponds to the lesser of (1) the excess of the mining tax on the operator's annual profit for the fiscal year over the operator's minimum mining tax for the fiscal year, and (2) the cumulative balance on account of the operator's minimum mining tax.

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