Commentary: Taking stock of Quebec’s new mining taxes

The Quebec Finance Minister Raymond Bachand’s budget on March 30, 2010, significantly revamped the Quebec mining duty regime with a view to mitigating the provincial deficit.

The tax rate increases immediately from 12% to 14% with 1 percentage point increases for each of Jan. 1, 2011, and Jan. 1, 2012, bringing the rate to 16%t (the usual pro-rations apply if an operator’s taxation year straddles two calendar years).

The following discussion is limited to the effects on operators of gold and silver mines in Quebec, but not in Northern Quebec. The changes are significant and affected operators should consult their advisors.

Under existing rules, an operator of a mine in Quebec must pay a Quebec mining duty (QMD) on its profit, which is determined under the Quebec Mining Duties Act. The operator determines annual output on all of its mines in total, then is permitted deductions and allowances including additional depreciation, depreciation, exploration, mineral deposit evaluation and mine development (MD) and any additional exploration allowance.

To encourage an operator to process and create value beyond the pit mouth, a processing allowance gives a perpetual return to the operator for the capital cost of eligible processing assets. Loss carry forwards are not permitted; but there is a refundable credit for losses.

However a credit refund for a loss is not always available because it is calculated as the lesser of the adjusted annual loss and MD incurred and claimed during the fiscal year. The credit on duties refundable for losses has also been refined. The budget changes affect some significant allowances and practices.

A key proposal is that profit is now determined on a “mine-by-mine” basis, not an aggregate, and operators must allocate expenses and file on this basis.

Under existing rules, an operator of more than one mine could shelter the profits of a producing mine with pre-production development expenses relating to another mine. This change will apply to an operator for a fiscal year beginning after budget.

Regarding depreciation, the rules provide that a road, building, equipment, or service property regularly used in mining acquired after May 12, 1994, goes into the 3rd class and is eligible for a 100% write-off.

The budget proposes that property acquired after budget date goes into property of a new 4th class and the depreciation rate is reduced to 30%. To limit the “excessive” flexibility offered to 3rd-class property, an operator cannot claim depreciation in the 4th class until the 3rd class is drained. Transitional rules apply for projects in construction on budget date.

The previous rules provide that an operator that did not refine or smelt, or only smelts or refines ore from a gold or silver, would compute its asset base for purpose of computing processing allowance using an 8% rate (7% under the budget) of eligible processing assets owned by the operator at the end of year used in Quebec.

The allowance was the lesser of the asset base and 65% (55% under the budget) of profit as determined under the QMD rules, which is generally profit after all deductions except additional depreciation or a similar claim for a northern mine. These changes will apply to an operator for fiscal years ending after budget day with the usual days pro-ration where a fiscal year includes that day.

The budget introduced other changes for an operator that processes, smelts or refines ore that is not from a precious-metal mine owned, and mine tailings.

Extensive changes are made for claims of exploration and development expenses.

Generally, all exploration, mineral-deposit evaluation and mine-development expenses incurred post-budget are divided into three separate cumulative accounts giving rise to separate allowances.

Exploration is a separate account and the previous single category of “mine development” is now split into two: “pre- and post-production expenses.”

The new definitions draw broadly from existing income-tax principles in the Quebec Taxation Act and the Federal Income Tax Act used to categorize expenses as Canadian exploration expenses (CEE) or Canadian development expenses (CDE).

New concepts replace the old rules, including whether an expense relates to a “mine that has come into production in reasonable commercial quantities” and a “new mine that enters production,” although the cost of a mining property remains non-deductible for Quebec mining-duty purposes.

Expenses financed and renounced pursuant to flow-through shares cannot be claimed by the operator even if they were only renounced federally and not for Quebec income-tax purposes.

An exploration expense is 100%-deductible under existing rules in calculating annual profit in the fiscal year incurred. The budget proposes that the maximum claim depend on an operator’s status.

An eligible operator is still able to claim 100% of exploration not exceeding a newly allowed cumulative pool at the end of the year, but a non-eligible operator can only claim the lesser of its pool and 10% of its annual profit.

Under the proposals generally only a junior exploration company that has never had a producing mine is an “eligible operator” provided it is not associated with a producer. The proposals apply to an operator’s fiscal year ending after budget date, for exploration expenses incurred after that day. After budget date the additional exploration allowance is eliminated.

A new mine is considered to have come into production when it produces in reasonable commercial quantities. Preproduction expenses (pre-MD) include mine-development expenses incurred to bring a new mine into production but preceding production in reasonable commercial quantities. Pre-MD is eligible for a 100% deduction with carry forward privileges for unclaimed amounts.

Expenses incurred after production fall into a second category (post-MD).

Existing rules provide that post-production mine-development expenses are deductible as a current expense against annual profit only for the fiscal year incurred. The new measures create a pool concept, and the post-MD claim equals the lesser of 30% of the pool balance at year end and the annual profit before such a claim.

However, the operator must deduct this amount and the unclaimed pool balance is carried forward. This change benefits an operator whose compulsory post-MD deduction resulted in little or no benefit if no refundable credit for losses was available.

— The author is a chartered accountant and principal of Toronto-based Jakolev Services Ltd., a boutique service advisory firm that focuses on income and mining taxation, workouts and M&A. He can be reached at jj@jetcapital.ca.