Commentary: Nothing to fear in Quebec’s proposed tax regime

Recently, mining operators and investors have been playing it safe in Quebec. No business wants to be in a situation where mining taxes become an intrinsic production cost that could jeopardize a project’s profitability.

Rather than tabling a legislative bill before the Quebec National Assembly, the government chose to issue an information bulletin in May. If tabled and passed as is by the National Assembly, most of the amendments will be effective in 2014.

What are the amendments to the existing regime? Firstly, the “new” mining tax regime adds a minimum progressive tax (Minimum Tax) of 1% on the first $80 million of the “output value at the mine shaft head,” plus 4% on such value exceeding $80 million. Unlike the concept of gross value of output, the output value at the mine shaft head does not include added-value stemming from processing, transportation, handling, storage and marketing of a mineral substance, or added-value stemming from mine tailings. The output value at the mine shaft head — which can never be less than 10% of the gross value of output — corresponds to the value of the mineral substance once extracted from Quebec soil, but before any other activity. We are far from the gross value concept to which the government wanted to apply a 5% tax.

Secondly, the mine by mine approach (i.e., deficits incurred in one mine do not reduce the earnings generated by another), used to calculate the mining duties on annual profits (Tax on Profits) will be subject to few changes, including an enhanced processing allowance to promote processing and treatment in Quebec. But most importantly, it will migrate towards progressive mining tax rates ranging from 16% to 28% on annual profits as follows: 16% for up to 35% profit margin; 22% for profit margins of 35% to 50%; and 28% for margins of 50% to 100%. In this context, “profit margin” should mean the annual profits (computed according to the Mining Tax Act) divided by the gross value of output for all mines.

Lastly, a set of deemed disposition rules will be added when an operator ceases to use certain types of properties, effective May 6, 2013.

Why will this “new” regime be less detrimental than expected? The operator will only have to pay the greater of the Minimum Tax and the Tax on Profits.

Furthermore, where the Minimum Tax exceeds the Tax on Profits, the excess could be carried forward over future years and applied against future Tax on Profits during the years in which this tax is greater than the Minimum Tax.

Finally, an operator will be allowed to deduct from its Minimum Tax a certain amount with respect to any annual losses incurred.

The Minimum Tax should only impact operators who are and will remain unprofitable. For the others, it is merely a cash flow issue.

Regarding the progressive mining tax rates, operators should manage to keep their profit margin below 35%, especially in light of the new enhanced processing allowance.

With this proposed regime, the government implicitly recognized that the previously announced regime would have ignored the cyclical nature of the mining industry and imposed a counterproductive tax, without regard to a mine’s profitability. Such a regime would have undoubtedly been a blow to the mining sector.

— Emmanuel Sala is a senior associate with Blake, Cassels & Graydon LLP with a practice in tax and mining law. He also lectures on taxation and mining phases at the Master of Laws (taxation option) program jointly sponsored by HEC Montreal and Université de Montreal’s Faculty of Law. He can be reached at emmanuel.sala@blakes.com.