the essentials of the taxation of mining in nunavut nunavut mining symposium 2013 april 9, 2013

THE ESSENTIALS OF THE TAXATION OF MINING IN NUNAVUT

Nunavut Mining Symposium 2013

April 9, 2013

Steve SuarezBorden Ladner Gervais LLP

TOR01-#5149739

2

Topics Covered

1. Income Taxation (federal and Nunavut)

2. Nunavut Mining Royalty

3. Flow-Through Shares

4. Mining in the Far North

3

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

4

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

5

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)

6

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

7

1. Income Taxation

• “Canadian development expense” (CDE): cost of acquiring a Canadian resource property, and post- production 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

8

1. Income Taxation

Class 41 Depreciable Property UCC

CEE CDE

What is included? • Most buildings, machinery and equipment used to earn income from a mine• Power generation and distribution equipment to supply a mine• Social services assets to support a mine or mining community• Railway track and ancillary equipment and machinery used to earn income from a mine• Property designed to explore for minerals

• Expenses to determine existence, quality, etc. of mineral resource in Canada (prospecting, surveying, etc.), unless mine already in commercial production• Expenses incurred pre- commercial production to bring mine into commercial production• Excluded: depreciable property, expenses generating pre-commercial production revenue

• Acquisition or preservation costs of CRP (right to prospect mine minerals in Canada, royalty in Canadian mineral resource, interest in land in Canada dependent on mineral content)• Expense of sinking or excavating a mine shaft or underground work in Canadian mineral resource, if incurred after mine in production• Excluded: depreciable property

Deduction rate (on year-end balance)

25% (100% in some cases) 100% (up to income) 30%

SUMMARY OF CANADIAN MINING EXPENSES

9

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

10


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 oflesser of•13% of total profit; and•the graduated rates in the following table:

11


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%








$45 million < profit 14%

12


Example of mining royalty computation for mine with profit of $14 million

Mine Profit 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

TOTAL $14 million $829,500

13


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

14


15


AssumptionsFlow-through shares purchased 10,000Price per FTS $10Mining company regular common share trading price $9

FTS premium per share $1Investor’s federal /provincial tax rate 46%CEE renounced per FTS $10..

Investor Cash Out Investor Cash InCost of FTS ($10/share) $100,000

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 $ 20,700 ________

$120,700 $136,000Investor’s positive cash flow $ 15,300

FTS CASH-FLOW EXAMPLE

16


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

17


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

18


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

19


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

20


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

21

The End

Thank you

For more on the Canadian taxation of mining, go to www.miningtaxcanada.com

Steve SuarezBorden, Ladner Gervais LLP (Toronto)

416 [email protected]

http://www.miningtaxcanada.com/

the essentials of the taxation of mining in nunavut nunavut mining symposium 2013 april 9, 2013

Documents