Mining is a high risk and capital intensive industry, therefore it is vital to be informed about the tax system as it can affect project economics and recovery time for capital investments. Canadian mining operations are subject to federal income tax, provincial and territorial income taxes. These taxes are applied to a mining company’s taxable income, which is generally the net of operating expenses, depreciation on capital assets, and the deduction of exploration and pre-production development costs. Depending on the project location provincial and territorial mining taxes, duties, or royalties can also be applicable on production profits or revenues. Mining royalties and taxes paid to a province or territory are completely deductible in computing income for federal tax purposes.
For December 31, 2013 year end, the federal corporate income tax rate was 15%, which only applies to projects within the Canadian Jurisdiction. Grass-roots exploration expenses fall under the cumulative Canadian Exploration Expense (CCEE), which is deductible at a rate of 100%. Grass-roots exploration expenses include costs incurred to determine the existence, location, extent, or quality of a mineral resource in Canada. Pre-production mine development expenses fall under cumulative Canadian Development Expenses (CCDE), which is deductible up to 30% of the unclaimed balance at the end of each year. Pre-production mine development costs include acquisition costs of Canadian resource properties, sinking/excavating a mine shaft, construction of haulage ways or other similar underground work incurred after the mine comes into commercial production. A Capital Cost Allowance (CCA) system also provides a 25% per year tax deductible for the company’s depreciable property.
Provinces and territories have varying income tax rate which range from 10% to 16% as seen in the table below. Many of the provinces/territories have special tax credits, but this article will mainly focus on Ontario mining taxes.
|Provincial tax rate||Combined rate|
|Newfoundland and Labrador||14%||29%|
|Prince Edward Island||16%||31%|
Taxation in Ontario
Ontario charges a 10% tax on mining operations that have a taxable profit greater than $500,000. Taxable profit is determined by taking the gross revenue from sale of the mine output and then deducting specified costs and expenses. Interest, financing costs, income taxes, profit taxes, royalties, and admin expenses not directly related to earning mining profits are not permitted for deductions. Companies in Ontario that have at least $100 million in gross revenues and at least $50 million in total assets are also subject to a 2.7% corporate minimum tax (CMT).
Ontario provides an exemption period where for the first three-year period, the first $10 million dollars of profit generated by a new mine or major expansion of an existing mine is exempt from taxes. Ideally, through careful planning the company should strive to maximize income earned during the exempt period. Exploration and development costs incurred in Ontario can also be fully claimed in the year incurred.
Mining assets have a depreciation allowance of 30% based on the straight-line method, but if assets are purchased prior to commencement of commercial production for use in the new mine then 100% depreciation can be claimed up to when the mines starts making a profit. Processing and transportation assets have a specific depreciation allowance of 15% based on the straight-line method. Depending on the degree of processing achieved, an annual processing allowance is calculated on the cost of all processing assets. A company that processes ore only to the concentrate stage has an allowance of 8% of the cost of concentrating assets. Where as, a company that operates a smelter and a refinery, has an allowance equal to 20% of the cost for the concentrating, smelting, and refining assets in the operation. Ontario is the only province that continues to incorporate a resource allowance for taxation, mainly for the purpose of calculating a national resource allowance. The resource allowance is calculated at 25% of the resource profits. Resource profits include income from:
- i. Concentrating, smelting, or refining of ore in Canada from mineral resources in Canada to any stage beyond the prime metal stage.
- ii. Royalties calculated with reference to the amount or value of production from mining operations in Canada
Ontario also imposes a non-refundable resource tax credit for resource companies that are permanently established in Ontario. The resource tax credit is calculated as per the equation below.
|Notional resource allowance|
|– Adjusted Crown royalties|
| = Subtotal
|x Ontario provincial tax rate|
| x Ontario allocation
|= Ontario non-refundable resource tax credit|
Where the notional resource allowance is 25% of the corporation’s adjusted resource profits and adjusted Crown royalties are the sum of all mining taxes and Crown charges paid.
Income tax has a significant impact on cash flows of a company, therefore it should always be considered when making capital budgeting decisions. Incorporating taxes can make both positive and negative effects on NPV and the view of the investment can change drastically if income tax is included. Investment and working capital cash flows do not affect taxable net income therefore tax adjustments are not required these sections.
Revenue cash inflows and expense cash outflows can be adjusted to find after tax cash flows using the equations below.
Depreciation expense provides tax savings described as a depreciation tax shield. Depreciation is a non-cash expense that reduces income tax paid by reducing the taxable income. Depreciation tax savings can be calculated using the formula below.
Once tax adjustments are made a more accurate and conservative NPV and IRR can be calculated, which gives a more practical assessment of the investment.