New budget threatens investment: MAC

The elimination of the resource allowance, announced by Finance Minister John Manley in his budget in mid-February, threatens mining investment in this country, according to the Mining Association of Canada (MAC).

“Tax changes announced in Budget 2003 are likely to raise the tax burden on the mining industry at a time when countries around the world are moving in the opposite direction,” says MAC President Gordon Peeling. “The competitiveness of Canadian mining is at stake.”

Details about how the government plans to phase out the resource allowance remain sketchy. A technical bulletin explaining the process will be released later in March.

“It should be phased in over five years,” says Gregory New, a mining taxation specialist with Pricewaterhouse Coopers. “Whether that’s evenly or front-loaded or back-loaded, we don’t know. I agree with the MAC when they say the resource allowance itself is hard to replace in a neutral way.”

The resource allowance came about in the early 1970s when the national government determined that provinces were charging too much in mineral royalties, which were tax-deductible. The government decided it would no longer allow companies to deduct mineral royalties charged by provinces, and replaced that system with what is now known as the resource allowance.

The allowance is a complicated scheme that lets companies write off such expenses as operating costs and depreciation (and even a portion of hedging, under certain circumstances) against earnings; 25% of the remaining resource profits are tax-free. In other words, companies generally pay federal taxes only on 75% of profits.

“In some cases the 25% was more generous, and in other cases the 25% was less generous, depending on the province and sometimes the mineral commodity,” says Ronald Gagel, vice-president of Toronto-based Aur Resources. “The government introduced all these things way back when, because they realized mining was a difficult, unique, capital-intensive, risky business, and was essential to the base economy.” For example, about 60% of all rail shipments are still mining-related.

The federal government has reverted to the old system, allowing companies once again to write off mineral royalties charged by provinces. The statutory royalty rate is 10% in Ontario, and 12% in Quebec (both rates are applied to a company’s taxable monies under each province’s tax rules).

But what if the provinces decide to make another cash grab by raising royalty rates? In the text of its budget, the federal government says that if the provinces raise rates, then it would disallow the deduction.

Dan Paszkowski, vice-president of economic affairs with the MAC, says that without the resource allowance, companies will be at a disadvantage.

“Most of our member companies feel they will be worse off as a result of the budget,” he says. “Everybody is out there running through what they anticipate this will mean for their corporation, but nobody appears to be happy.”

Other mining-related measures announced in the budget are as follows:

q The corporate tax rate will be reduced to 21% over five years, down from 28% now. This puts mining on a par with other areas such as high-tech and financial sectors.

q The “super” flow-through share program was extended for another year, albeit reduced to 10% from 15% of costs to individuals who invest in flow-through shares. The buying period will now close Dec. 31, 2004, for eligible expenses incurred in the period ending Dec. 31, 2005.