CLF

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CANADAS MINING TAXATION REGIME
Robert J. ClarkNatural Resources CanadaMarch
2008
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Principles Underlying the CanadianTax Regime for
Mining

• Private sector undertakes mineral development and
  determines its pace.
• Government plays a complementary role.
• Rules and regulations are made known in advance
  of project development.
• Range of stakeholders are consulted on proposed
  modifications.

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Canada Allows Payback BeforeMost Tax Payments
Become Due
Pre-Production Period
Production Period
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Canadas Current System

• Federal Corporate Income Tax
• The tax rate is 19.5
• Provincial and Territorial Taxes
• The Corporate Income Tax generally follows
  federal income tax rules - Rates vary from 9.9
  to 16
• Mining Taxes generally vary from 10 to 18 of a
  measure of profits
• Some provinces levy a Tax on Capital

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The Federal Income Tax

• Normal costs of doing business are generally
  allowed as a deduction from income.
• Tax treatment of a mining expense depends on when
  the expense was incurred
• Pre-production expenses and capital expenditures
  get 100 amortization.
• Expenses and capital expenditures incurred during
  production get 25-30 amortization.
• Provincial oil and gas royalties, mining taxes
  and capital taxes are deductible.
• Operating losses can be carried back three years
  and forward 20 years.

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Depreciation/Capital Cost Allowance
Deductions from Taxable Income

• Most mining depreciable assets are eligible for a
  Capital Cost Allowance (depreciation) of 25.
• Capital costs for a new mine or major expansion
  get Accelerated Capital Cost Allowance of up to
  100.

Operating Expenses

• Costs incurred after production commences for
• on-site exploration (delineation drilling)
• clearing, overburden removal
• underground rockwork, excavation
• are deductible when incurred.

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Deductions from Taxable Income
Canadian Exploration Expenses

• 100 deduction for exploration and pre-production
  development expenses.
• Unused balances can be carried forward
  indefinitely.
• Can be transferred to flow-through-share
  investors.

Canadian Development Expenses

• 30 declining balance write-off for mine
  development expenses incurred during production.
• Unclaimed balances may be carried forward
  indefinitely.
• Can be transferred to flow-through-share
  investors.

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Provincial Mining Taxes (Royalties)-Common
Approach

• Mining taxes are legislated (no mine-specific
  contracts).
• Mining taxes are mainly profit-based in most
  provinces/territories
• Mining and processing assets are depreciable
• Pre-production expenses are deductible
• Exploration expenses are at least 100 deductible
• Most provinces/territories have processing
  allowance
• Interest, depletion, cost of mining property are
  not deductible.
• Tax concessions in early years or favourable
  deductibility to allow operators to recover their
  capital costs before tax/royalty become payable.

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Provincial Mining Taxes Main Variations

• Tax structures vary from a single rate to
  two-tier rates and sliding scale tax rates.
• Depreciation method vary from straight-line to
  declining balance and combination of the two.
• Mining tax in some provinces/territories are
  commodity-specific e.g.
• Saskatchewan potash and uranium
• Ontario metals vs. diamonds.

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1993 Average Effective Tax Rates for Project with
10 IRR
(PT - profit tax rate, GR - gross royalty rate,
ET - export tax rate)
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2003 Average Effective Tax Rates for Project with
10 IRR
(PT - profit tax rate, GR - gross royalty rate,
ET - export tax rate)
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Canadas Share of Worldwide Exploration
2007 Worldwide Exploration Spending by Region
1999 Worldwide Exploration Spending by Region
Source Metals Economics Group
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Exploration Incentives

• The principal incentive for exploration is the
  100 deduction from taxable income for Canadian
  Exploration Expenses (CEE).
• Flow-Through Shares which allow an oil and gas,
  mining or renewable energy company to flow the
  CEE through to their investors for deduction
  against their personal or corporate taxable
  income.
• A 15 tax credit for surface exploration linked
  to Flow-Through Shares.
• A 10 tax credit for all CEE not available for
  Flow-Through Shares.

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Flow-Through Shares and Super Flow-Through

• A Flow-Though Share is a type of common share
  which allows a principal-business corporation
  to transfer the tax deductions to investors, who
  can apply them against their personal or
  corporate income tax.
• A principal-business corporation is a
  corporation involved in exploration, production
  and processing of minerals, or oil and gas or in
  renewable energy and conservation activities.
• Super Flow-Through is a term coined by the
  Prospectors and Developers Association of Canada
  to describe the combination of the 15 Tax Credit
  with Flow-Through Shares.

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Key Factors - Tax Advantages for Investors

• Investors receive a 100 income tax deduction for
  Canadian Exploration Expenses.
• Since the corporate tax rate is lower than the
  top personal tax rate, the tax deduction is more
  valuable in the hands of the individual.
• On the sale of the shares, only 50 of realized
  capital gains are included in income.
• For surface exploration, the investor may be
  eligible for the federal 15 tax credit, and
  complementary provincial tax credits (BC 20,
  Manitoba 10 and Ontario 5) or in Quebec an
  additional 50 deduction from taxable income.

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Flow-Through Share Incentives and Exploration
Expenditures
MPI 1971100
Constant 2006 millions
ITCE 15 tax credit
MEDA, 33 1/3
CEIP 30
1981, proceeds subject to capital gain tax
1985-1994, 100K lifetime capital gains exemption
1996, Look back rule
2001, capital gain inclusion rate reduced to 50
Other developments
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Tax Advantages by Province/Territory
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Effectiveness Regional Distribution
2007 Total 2506 Million
Northwest Territories 153 M
Yukon 144 M
Nunavut 267 M
British Columbia 425 M
Newfoundland and Labrador 160 M
Manitoba 103 M
Alberta 15 M
Quebec 385 M
Saskatchewan 277 M
Nova Scotia 27 M
Ontario 519 M
New Brunswick 31 M
Source Natural Resources Canada, from the
federal-provincial-territorial survey of Mineral
Exploration, Deposit Appraisal and Mine Complex
Development Expenditures. Based on revised
company spending intentions compiled in August
2007 (totals could vary slightly as data are in
final validation stage).
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Effectiveness Commodity Emphasis
Note Includes on-mine-site plus off-mine-site
activities for field work and overhead
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Rules Facilitating Foreign Investment into Canada

• No restrictions on foreign exchange, and
  repatriation of capital or profits.
• Canadian resource tax treatment is obtained by
  incorporating a company whose activities qualify
  as a Principal-Business Corporation.
• Equity capital can be repatriated tax-free.
• Withholding tax rates are low and declining.

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Taxation Trends in Canada

• Federal government
• Reducing corporate tax rate from 19.5 in 2008
  to 15 by 2012.
• Reducing special tax provisions.
• Provincial/Territorial governments
• Provinces have lowered or are lowering corporate
  tax rates most rates are expected to fall in the
  10 to 12 range.
• Most provinces are reducing or eliminating
  capital taxes, or no longer have capital taxes.