Canada: Quebec's New Mining Tax Regime: A Comparative Analysis

Notice to reader: All terms (excluding defined terms) in quotation marks in this article have the same meaning as in the Mining Tax Act.

Over the last few months, mining companies and investors have been playing it safe in Quebec. Against the backdrop of a decline in metal prices this past year, mining investment has come to a standstill in Quebec. No business wants to be placed in a situation where mining taxes have become an intrinsic production cost that could jeopardize the profitability of a project. On May 6, 2013, the Parti Québécois minority government (the Government) implicitly recognized that the so-called ad valorem regime it had initially proposed would have been, as the mining industry anticipated, a blow to the mining sector, a major economic force for Quebec development (see our March 2013 Blakes Bulletin: Will Fiscal Uncertainty Undermine Investment and Stifle Wealth Creation?).

1. QUEBEC'S CURRENT MINING TAX REGIME

In June 2009, the Quebec government unveiled Quebec's first mineral strategy, entitled Preparing the Future of Quebec's Mineral Sector. One of the policy directions of that strategy was to overhaul the then existing mining royalties regime in an attempt to reflect the cyclical nature of the mineral sector and to see that the Province is fairly compensated for the depletion of the non-renewable resources belonging to the public domain (see our July 2009 Blakes Bulletin: Quebec Government Unveils Mineral Strategy).

Since the 2010-2011 Quebec budget, mining royalties have been determined on a "mine-by-mine" basis. Under that regime, for each of its profitable mines located in Quebec, a company which develops a mineral substance in reasonable commercial quantities (the "Operator") pays the province up to 16% of the Operator's "annual profit" (the "Annual Profit") (see our July 2010 Blakes Bulletin: Quebec Mining Duties Regime – Substantial Changes Proposed).

An Operator's Annual Profit is established in two steps:

Step 1: calculation of the Operator's "annual earnings" for each of the Operator's mines (the "Annual Earnings");

Step 2: calculation of the Operator's Annual Profit determined based on the Operator's total Annual Earnings, among other things.

TABLE 1

STEP 1: ANNUAL EARNINGS

ADD

DEDUCT

  • The Operator's gross value of annual output ("Gross Value of Output")* reasonably attributable to the mine

*It is important to note that the Gross Value of Output generally includes not only the market value of the mined mineral substances but also the value of processing products. Furthermore, the amounts and allowances used in calculating the Annual Earnings cannot increase a loss established in step 2 of the calculation.

  • The operating expenses incurred to realize the portion of the Gross Value of Output which is reasonably attributable to the operation of the mine (the "Operating Expenses")
  • The recapture of depreciation resulting from the disposition of depreciable property used in the operation of the mine
  • The depreciation allowance for Class 1 (15%) (acquired before 1975), Class 2 (30%) (acquired between 1975/04/01-1994/05/12), Class 3 (100%) (acquired between 1994/05/13-2010/03/30) and Class 4 (30%) (acquired since 2010/03/31) property (the "Class 1-4 Depreciation Allowance")
  • The allowance for post-production development expenses
  • The allowance for post-extraction activities, such as processing and certain treatment of the mineral substance (7% or 13%, depending on the activity) without exceeding 55% of Annual Earnings before deduction of certain allowances (the "Processing Allowance"). For further details, see Table #5.
  • The additional depreciation allowance (the "Additional Depreciation Allowance")
  • The terminal loss upon disposition of depreciable property (the "Terminal Loss on Depreciable Property")
  • The additional allowance for a northern mine (the "Northern Allowance")
  • The additional allowance for a mine located in Northern Quebec (the "Northern Quebec Allowance")
  • The amounts paid by the Operator for the reclamation of land that is or was used for the operation of the mine.

TOTAL ADDITIONS AND DEDUCTIONS = ANNUAL EARNING

TABLE 2

STEP 2 : ANNUAL PROFIT (ANNUAL LOSS)

ADD

DEDUCT

  • Total Annual Earnings (excluding deficits*) for all mines of the Operator.

* The deficits incurred by an Operator in connection with the operation of a mine do not reduce the Annual Earnings attributable to another mine.

  • Allowance for exploration expenses (the "Exploration Allowance")
  • Allocation for pre-production development expenses (the "Pre-Production Development Allowance")
  • Amount of general administrative expenses relating to exploration work
  • Amount of donations made in Quebec (up to 10% of the Operator's Total Annual Earnings)
  • Amount of expenses for scientific research and experimental development carried out in Canada relating to the Operator's mining operation

TOTAL ADDITIONS AND DEDUCTIONS = ANNUAL PROFIT OR ANNUAL LOSS

If the Operator realizes an Annual Loss (not to be confused with the notion of deficit) rather than an Annual Profit, the Operator may claim a refundable duties credit for losses (the "Credit on Duties Refundable for Losses") which varies depending on whether or not the Operator qualifies as an eligible Operator (i.e., the group of companies has not reached the commercial business stage). The Credit on Duties Refundable for Losses has a significant impact on the net compensation Quebec collects under the Mining Tax Act.

The Credit on Duties Refundable for Losses which an eligible Operator can use is equal to 16% of the lesser of:

  • the Operator's adjusted Annual Loss (the "Adjusted Loss");
  • the total of (i) 50% of the exploration expenses incurred by the Operator, not exceeding the amount deducted as Exploration Allowance; and (ii) the post-production development expenses incurred by the Operator, not exceeding the amount deducted as the Pre-Production Development Allowance.

The Credit on Duties Refundable for Losses which a non-eligible Operator can use is equal to 16% of the lesser of:

  • the Operator's Adjusted Loss;
  • the pre-production development expenses incurred by the Operator, not exceeding the amount deducted as Pre-Production Development Allowance.

2. NEW MINING TAX REGIME IN QUEBEC AS OF JANUARY 1, 2014

On May 6, 2013, rather than tabling a bill before the National Assembly, the Government, through its Minister of Finance, chose instead to issue Information Bulletin 2013-4: Revision of the Mining Tax Regime (the Bulletin).

The Government implicitly acknowledges that excessive taxation could undermine mining investment and shorten the lifespan of the operating phase of mining projects due to the negative impact of certain factors on their economic value.

The new mining tax regime differs from the old one in that it essentially adds a minimum progressive mining tax (the "Minimum Mining Tax"). The calculation of mining taxes based on Annual Profit, as we know it, will be the subject of a few changes but will migrate toward a progressive mining tax on profits based on profit margin (the "Mining Tax on Profits"). The Operator will only have to pay, as mining duties, the greater of the Minimum Mining Tax and the Mining Tax on Profits. In this context, the current mining regime is not replaced but is at most amended.

A. The Minimum Mining Tax

TABLE 3

THE MINIMUM MINING TAX

1% of the first C$80-million of the "output value at the mine shaft head" (the "Output Value at the Mine Shaft Head")

Plus

4% of the excess of the Output Value at the Mine Shaft Head over an amount of C$80-million

There is a fundamental difference between the Gross Value of Output currently used in the calculation and the Output Value at the Mine Shaft Head, which does not include added-value stemming from processing, transportation, handling, storage and marketing of a mineral substance or that stemming from the processing of mine tailings. The Output Value at the Mine Shaft Head in fact corresponds to the value of the mineral substance once extracted from Quebec soil but before any other activity.

We are therefore far from the gross value to which the Government wanted to apply a 5% royalty before public consultations were held.

Note that the amount of C$80-million subject to the 1% rate will have to be shared among associated Operators within the meaning of the Taxation Act.

TABLE 4

OUTPUT VALUE AT THE MINE SHAFT HEAD

ADD

DEDUCT

  • Gross Value of Output

Operating Expenses reasonably attributable to:

  • crushing, grinding, sieving, processing (including certain processing activities), handling, transportation or storage
    (i) of the mineral substance from its first accumulation site after it is removed from the mine and, if applicable, (ii) the processing products obtained;
  • marketing of (i) the mineral substance and, if applicable,
    (ii) the processing products obtained (collectively, "Post-Extraction Activities")
  • The adjustment resulting from use of a different method from one fiscal year to another to determine the Gross Value of Output, if applicable
  • The general administrative expenses related to the Post-Extraction Activities
  • The portion of the amount received or receivable in consideration of the disposition of gemstones (that have not been mixed with other gemstones) in favour of an unrelated person, if the value of that portion has not been included in the determination of the Gross value of Output for a prior fiscal year
  • The depreciation allowance for Post-Extraction Property: (Class 1A (15%), Class 2A (30%), Class 3A (100%), Class 4A (30%) [no allowance for Class 4A property if the "undepreciated capital cost" of Class 1A, 2A and 3A property is greater than zero] ("Depreciation Allowance for Post-Extraction Property")
  • An amount, other than "government assistance", received or receivable from a person or partnership because of an expense incurred for a fiscal year that started after December 31, 2013 and that is an expense deducted in calculating the Output Value at the Mine Shaft Head
  • The enhanced processing allowance to encourage processing and treatment in Quebec ("Enhanced Processing Allowance")* See Table #5 for details.

*A processing allowance is generally designed to exempt from taxation the added value resulting from activities downstream from extraction. Under both the current regime (Processing Allowance) and the proposed regime (Enhanced Processing Allowance), this added-value is therefore only subject to the general corporate income tax regime.

  • The portion of the recapture of depreciation for property of new Class 1A, 2A, 3A and 4A*, essentially property that forms part of Class 1, 2, 3 and 4, respectively, under the current regime and that is used in "processing" or 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 (the "Post-Extraction Property")**

*Class 4A will include a road, a building, equipment or service property regularly used in the mining operation (under the current regime, Class 4 does not include materials).

**Accordingly, property used in connection with marketing activities as well as that used in connection with the Operator's administrative activities will not be Post-Extraction Property.

  • The terminal loss relating to Post-Extraction Property (the rules applicable to the Additional Depreciation Allowance will apply with necessary modifications)

TOTAL ADDITIONS AND DEDUCTIONS = OUTPUT VALUE AT THE MINE SHAFT HEAD

An Operator's Output Value at the Mine Shaft Head, for a fiscal year, in respect of a mine operated by the Operator may in no event be less than 10% of the Operator's Gross Value of Output. In other words, if, due to a decline in metal prices or through the combination of allowances and deductions mentioned above, the Output Value at the Mine Shaft Head is nil or negative, the progressive royalties of 1% and 4%, if applicable, will apply to an amount equal to 10% of the Gross Value of Output. No one may claim that such a taxation structure will not affect the financial health and survival of small operators already operating at a loss, due in particular to market conditions.

TABLE 5

PROCESSING ALLOWANCE (UNDER THE CURRENT REGIME)
vs
ENHANCED PROCESSING ALLOWANCE (UNDER THE NEW REGIME)

PROCESSING ALLOWANCE

ENHANCED PROCESSING ALLOWANCE

Operator's activity

Rate of return applied to the capital cost of property used in processing activities in Quebec

Operator's activity

Rate of return applied to the capital cost of property used in processing activities in Quebec (a proportional rate must be used if the property is not 100% used in processing activities in Quebec)

The Operator does not engage in smelting or refining (ex: concentration only) or engages in smelting or refining of ore from a gold or silver mine

7 %

The Operator only engages in concentration (including smelting or refining of ore from a gold or silver mine)

10%

The Operator engages in smelting or refining of ore other than that from a gold or silver mine

13%

The Operator engages in smelting or refining of ore (other than that from a gold or silver mine exclusively outside Quebec)

13% (reduced to 10% in respect of assets used for the concentration of ore in the proportion in which such assets will be used for the concentration of ore which will not be smelted or refined by the Operator

The Operator engages in smelting or refining of ore other than from a gold or silver mine, but with respect to assets used in the concentration of ore which is neither smelted nor refined by the Operator

7%

The Operator engages in smelting or refining of ore (other than that from a gold or silver mine) in Quebec

20% [(i) reduced to 13% in respect of assets used in the processing of ore, in the proportion in which the assets will be used for the processing of ore, which is not smelted or refined in Quebec (ii) reduced to 10% in respect of assets used for the concentration of ore, in the proportion that such assets will be used for the concentration of ore that will be neither smelted nor refined by the Operator]

Maximum amount

Maximum amount

Limited to 55% of the Operator's annual profits, before deducting Processing Allowance, Additional Depreciation Allowance, Northern Allowance and Northern Quebec Allowance

Limited to the greater of (i) 75% of Operator's Annual Earnings, before deducting Enhanced Processing Allowance, Additional Depreciation Allowance, Northern Allowance and Northern Quebec Allowance and (ii) 30% of the Output Value at the Mine Shaft Head, before deducting Enhanced Processing Allowance

The changes to the parameters of the Processing Allowance used to determine the Enhanced Processing Allowance an Operator may deduct in calculating the Operator's Annual Earnings will apply with necessary modificationsto the calculation of the Operator's Adjusted Loss for purposes of the Credit on Duties Refundable for Losses indicated at the end of section 1.

B. The Mining Tax on Profits

Except for the tax rates, almost all parameters used in calculating the Mining Tax on Profits come from the current Mining Tax Act. Only two aspects of the Annual Earnings will change. The calculation of the Annual Profit, as described above in this article, remains the same.

a) Annual Earnings

The main change is the replacement of the Processing Allowance by the Enhanced Processing Allowance. See Table #5 for details.

Moreover, the introduction of new classes for Post-Extraction Property (i.e., Class 1A, 2A, 3A and 4A property) will necessarily have an impact with respect to the recapture of depreciation, allowances and terminal losses. For example, the new Depreciation Allowance for Post-Extraction Property will only be available where the Class 1-4 Depreciation Allowance is no longer available (i.e., the Class 1 to 4 property will have been completely depreciated).

All other deductions and allowances currently available in connection with the calculation of the Annual Earnings will remain available, including (i) the Operating Expenses, (ii) the allowance for post-production development expenses, (iii) the Additional Depreciation Allowance, (iv) the Terminal Loss on Depreciable Property, (v) the Northern Allowance, (vi) the Northern Quebec Allowance or (vii) the deduction for amounts paid by the Operator for the rehabilitation of land that has been or is being used to operate the mine.

b) Applicable Tax Rates

The single tax rate of 16% for determining the Mining Tax on Profits will be replaced by progressive tax rates ranging from 16% to 28%, based on the Operator's profit margin:

  • up to 35% profit margin: 16%
  • 35% to 50% profit margin: 22%
  • 50% to 100% profit margin: 28%

The definition of an Operator's "profit margin" should be the Annual Profit divided by the Gross Value of Output for all mines operated by the Operator.

c) Credit on Duties Refundable for Losses (16%)

Changes will be made to the calculation of the Adjusted Loss (component of the calculation of the Credit on Duties Refundable for Losses) to take into account the Enhanced Processing Allowance replacing the Processing Allowance.

C. The Minimum Mining Tax – A True "Minimum" Tax?

a) Impact of the New Non-Refundable Minimum Tax Credit

As mentioned above, an Operator will have to pay mining taxes equal to the greater of the Minimum Mining Tax and the Mining Tax on Profits. Where the Minimum Mining Tax exceeds the Mining Tax on Profits, the excess may be carried forward over future years and applied against future Mining Tax on Profits during the years in which this tax is greater than the Minimum Mining Tax, in the form of a "non-refundable credit on account of the Minimum Mining Tax" (the "Minimum Mining Tax Credit").

The excess of an Operator's Minimum Mining Tax over the Operator's Mining Tax on Profits will be added to the cumulative balance of the Minimum Mining Tax (the "Minimum Mining Tax Cumulative Balance") which will enable the Operator to reduce the amount of the Operator's mining duties payable for a subsequent fiscal year where the Operator's mining duties payable for such fiscal year are equal to the Operator's Mining Tax on Profits.

In the event that the Operator is required to pay mining duties equal to the Mining Tax on Profits for a subsequent year, the Operator will be permitted to deduct from the Operator's mining duties payable the Minimum Mining Tax Credit which is equal to the lesser of:

  • the excess of the Operator's Mining Tax on Profits over the Operator's Minimum Mining Tax; and
  • the Operator's Minimum Mining Tax Cumulative Balance.

This Minimum Mining Tax Credit will also reduce the Minimum Mining Tax Cumulative Balance.

Although the impact of the Minimum Mining Tax can be lessened, the fact remains that the use of amounts carried forward will be limited each year so that the Operator will always pay an amount of Mining Tax on Profits at least equal to the Minimum Mining Tax calculated for the given fiscal year.

It is clear that the Minimum Mining Tax will have a negative impact only on corporations which will never become profitable. For the others, it is a question of the value of money over time and, accordingly, only interest expenses relating to this tax should be taken into account in financial analyses. The Minimum Mining Tax should be compared somehow to the alternative minimum tax under the Income Tax Act.

c. Impact of the Credit on Duties Refundable for Losses

It is interesting that an Operator which is required to pay mining duties equal to the Minimum Mining Tax may deduct from the Operator's mining duties payable an amount equal to the Operator's Credit on Duties Refundable for Losses and apply for reimbursement of any amount corresponding to the excess of this credit over the mining duties payable.

3. Measures to Ensure the Integrity of the Mining Tax Regime Applicable as of May 6, 2013

The following is a list of the measures announced by the Government and found in the Bulletin which are designed to increase the integrity of the mining tax regime:

  1. Deemed disposition of the depreciable properties of a person or partnership that ceases, for an indeterminate period of time, all activities relating to its mining operations. The proceeds of the disposition of a property will be equal to the lesser of (i) the fair market value of such property at the time of the disposition or (ii) the capital cost of such property at such time.
  2. Deemed disposition of certain depreciable property (i.e., Class 1, Class 2, Class 1A and Class 2A) of an Operator when it ceases to be actually used in the mining operations. The proceeds of the disposition will be equal to the lesser of (i) the fair market value of such property at the time of the disposition and (ii) the capital cost of such property at such time.
  3. Deemed disposition of certain depreciable property (i.e., Class 3, Class 4, Class 3A and Class 4A) of an Operator when it ceases to be regularly used in the mining operations. The proceeds of the disposition will be equal to the lesser of (i) the fair market value of such property at the time of the disposition and (ii) the capital cost of such property at such time.
  4. Anti-avoidance measure: presumption that an Operator and an associated entity are one and the same person where (i) the Operator disposes, directly or indirectly, in favour of the associated entity, of all or part of the mineral substances and, if applicable, the processing products; and (ii) it is reasonable to consider that one of the main reasons for the separate existence of the Operator and the associated entity is to reduce the amount of mining duties that would otherwise be payable under the Mining Tax Act or to increase the Credit on Duties Refundable for Losses or the Minimum Mining Tax Credit that may be claimed.

4. CONCLUSION

The federal and Quebec tax regimes have been shaped over time to take into account the challenges facing businesses, whether cyclical, economic or social. Our tax regime has distanced itself from counterproductive duties and taxes such as the tax on capital, which was abolished in Quebec and at the federal level several years ago. A regime such as that proposed by the Parti Québécois during the 2012 election campaign would have ignored the cyclical nature of the mining industry and imposed a counterproductive tax, namely taxation based primarily on income, without regard to a mine's profitability.

Changing the mining tax regime to constantly take into account the vagaries of the economic environment, market reality and resources, to name only a few, would likely make the mining tax regime unfair, inefficient and, especially, unpredictable. This context may be what forced the Government to show restraint in its final approach, thus only proposing, as some may believe, amendments to the current mining regime, a long and fastidious exercise that, if the announced measures are adopted, will increase tax revenues well below the level initially anticipated by the Government.

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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