THE ESSENTIALS OF THE TAXATION OF
MINING IN NUNAVUT
Nunavut Mining Symposium 2013
April 9, 2013
Steve Suarez
Borden Ladner Gervais LLP
TOR01-#5149739
Topics Covered
1. Income Taxation (federal and Nunavut)
2. Nunavut Mining Royalty
3. Flow-Through Shares
4. Mining in the Far North
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Taxation Principles
• Importance: taxation affects a mining project’s economic
viability, and so must be factored into a go/no go decision
• Stability: since mining projects are long-term undertakings
requiring long-term planning, a stable, predictable tax regime is
a big plus
• Fairness: businesses hate paying taxes when they aren’t
making money, so, (1) profit–based taxes are perceived as
fairer than revenue–based taxes, and (2) businesses want to
recover their costs before paying taxes
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Overview of Canadian Taxes on Mining
Principal Features
Federal Income Tax
Canadian residents taxable on worldwide
income. Income computed for each
“source”; certain deductions permitted in
computing “taxable income”; applicable tax
rate then applied to determine tax payable
Provincial/Territorial Income Tax
Generally computed the same as federal
income tax (different rates)
Provincial/Territorial Mining Royalty
Significant variation among jurisdictions, but
generally levied as a percentage of mine
output; deductible for income tax purposes
Other Taxes
5% federal value-added goods and services
tax; most provinces levy a corresponding
(harmonized) sales tax (but none of the
territories); also consider payroll, property,
and fuel taxes
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1. Income Taxation
• federal and territorial corporate income taxes are computed as
a % of taxable income (profits minus permitted deductions)
• federal rate of tax = 15%
• Nunavut rate of tax = 12%
• both taxes are administered by the federal government (Canada
Revenue Agency)
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1. Income Taxation
Significant deductions from “profit” in computing taxable income:
• interest expense on debt
• “Canadian exploration expense” (CEE):
costs incurred in (1) determining existence, quality or quantity
of a mineral resource, or (2) bringing a mine into production (if
incurred before the mine is producing in commercial quantities)
- 100% deductible
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1. Income Taxation
• “Canadian development expense” (CDE):
cost of acquiring a Canadian resource property, and postproduction costs of mine shafts and similar underground work
- 30% deductible per year
• “Capital cost allowance” (CCA):
cost of buildings, structures, machinery and equipment for a
mine; social services assets, power generation equipment,
railway track and equipment
- deductible at 25% per year; 100% deductible in some
circumstances
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1. Income Taxation
SUMMARY OF CANADIAN MINING EXPENSES
Class 41 Depreciable
Property UCC
What is included?
Deduction rate (on yearend balance)
CEE
CDE
• Most buildings, machinery • Expenses to determine
• Acquisition or preservation
and equipment used to
existence, quality, etc. of
costs of CRP (right to prospect
earn income from a mine
mineral resource in Canada mine minerals in Canada,
• Power generation and
(prospecting, surveying,
royalty in Canadian mineral
distribution equipment to etc.), unless mine already in resource, interest in land in
supply a mine
commercial production
Canada dependent on
• Social services assets to
• Expenses incurred premineral content)
support a mine or mining
commercial production to • Expense of sinking or
community
bring mine into commercial excavating a mine shaft or
• Railway track and ancillary production
underground work in
equipment and machinery • Excluded: depreciable
Canadian mineral resource, if
used to earn income from property, expenses
incurred after mine in
a mine
generating pre-commercial production
• Property designed to
production revenue
• Excluded: depreciable
explore for minerals
property
25% (100% in some cases)
100% (up to income)
30%
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2. Nunavut Mining Royalties
Producing mines are subject to an annual royalty based on the
value of the mine’s output, under the Northwest Territories and
Nunavut Mining Regulations (C.R.C., c.1516)
• royalty is a % of mine’s annual profit
• computed based on value of mine output (sales and inventory
value changes) less permissible deductions
• intended to measure profit at the mine mouth
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2. Nunavut Mining Royalties
Mining royalty on Crown lands is administered by the federal
government, which keeps the money
Permissible deductions similar to those for income tax, but
interest expense is not deductible, nor are royalties or costs for
offices off the mine site
Royalty rate applicable to annual profit from a mine on Crown
lands is the lesser of
• 13% of total profit; and
• the graduated rates in the following table:
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2. Nunavut Mining Royalties
Bracket
Value of the Mine’s Output (Mine Profit)
Marginal Royalty Rate
profit < $10,000
0
$10,000 < profit < $5 million
5%
$5 million < profit < $10 million
6%
$10 million < profit < $15 million
7%
$15 million < profit < $20 million
8%
$20 million < profit < $25 million
9%
$25 million < profit < $30 million
10%
$30 million < profit < $35 million
11%
$35 million < profit < $40 million
12%
$40 million < profit < $45 million
13%
$45 million < profit
14%
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2. Nunavut Mining Royalties
Example of mining royalty computation for mine with profit of $14 million
Mine Profit
TOTAL
Marginal Royalty
Rate
Royalty Payable
$10,000
0
0
$5 million - $10,000
5%
$249,500
$10 million - $5 million
6%
$300,000
$14 million - $10 million
7%
$280,000
$14 million
$829,500
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3. Flow-Through Shares
Flow-through shares (which are unique to the natural resources industry)
are a financing tool intended to create incentives for exploration and
development.
• mining companies conducting exploration and development activities
are incurring tax-deductible expenses (CEE and CDE), which they
often can’t use (no taxable income)
• they also need to raise money in order to finance their exploration and
development activities
FTS allow an investor who purchases new common shares from the
mining company to deduct for income tax purposes CEE or CDE that the
mining company incurs, transferring the tax deduction to the investor,
and allowing the mining company to get a higher price for its shares
• for “grassroots” exploration CEE, the investor may also claim a 15%
investment tax credit
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3. Flow-Through Shares
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3. Flow-Through Shares
FTS CASH-FLOW EXAMPLE
Assumptions
Flow-through shares purchased
Price per FTS
Mining company regular common share trading price
10,000
$10
$9
FTS premium per share
Investor’s federal /provincial tax rate
CEE renounced per FTS
..
Cost of FTS ($10/share)
$1
46%
$10
Investor Cash Out
$100,000
Investor Cash In
Tax savings from $100,000 renounced CEE
$ 46,000
Investor’s proceeds from selling FTS in market
$ 90,000
Tax owing on capital gain from sale of FTS
Investor’s positive cash flow
$ 20,700
________
$120,700
$136,000
$ 15,300
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4. Mining in the Far North
Payroll Tax: applicable to employees who work in
Nunavut
• 2% of remuneration (including most non-cash remuneration)
• collected at source by employers, who are required to register
• N/A to employees normally working outside Nunavut who earn
< $5,000 in Nunavut during the year
• for employees paying Nunavut income tax, effectively payroll
tax on the first $60,000 of income is credited back
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4. Mining in the Far North
Fuel Tax: applicable to fuel consumed in Nunavut
• tax must be paid even when fuel purchased elsewhere and
imported into Nunavut for sale or consumption there
• fuel tax rebate offered for fuel consumed in unlicensed
machinery and used directly in mining exploration
• rebate also offered to Nunavut-registered companies for fuel
consumed in unlicensed machinery and equipment used
directly in mine development, mineral extraction or
reclamation, if the company enters into and complies with a
Development Partnership Agreement with the Government of
Nunavut
• in both cases, fuel must have been purchased in Nunavut or
imported in accordance with statute
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4. Mining in the Far North
Mining in the Far North involves greater challenges than
elsewhere in Canada
• vast distances
• lack of infrastructure
• inhospitable climate
• high living costs
Mining companies looking for economically viable mineral
resources and then seeking to bring them into production perform
some functions carried out by government in other regions
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4. Mining in the Far North
The 2013 federal budget included changes that will increase the
tax burden on the mining industry
• accelerated CCA (100% deduction) is being removed for the
mining industry, starting in 2017
• pre-production mine development expenditures are being
moved from CEE (100% deduction) to CDE (30%/year
deduction), starting in 2015
The 2012 federal budget eliminated the 10% investment tax credit
for pre-production mining expenditures
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4. Mining in the Far North
What can the taxation system do to encourage mining
in Canada’s Far North?
• a targeted tax credit for exploration carried out in the Far North
• make the 15% FTS investor tax credit for grassroots
exploration CEE permanent
• make all costs associated with community consultation and
environmental regulation 100% deductible
• provide for accelerated CCA for mining in the Far North
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The End
Thank you
For more on the Canadian taxation of mining, go to
www.miningtaxcanada.com
Steve Suarez
Borden, Ladner Gervais LLP (Toronto)
416 367-6702
ssuarez@blg.com
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