2010 Quebec Budget Changes to Mining Tax Regime
The Budget proposed by the Quebec government in March 2010 makes significant changes to the province’s mining tax rules. The existing rules levy a tax at the rate of 12% of a mine operator’s annual profit, determined by subtracting permitted deductions and allowances from the gross value from the operator’s annual output from all mines within Quebec. Permitted allowances include depreciation allowances, an allowance for mines in the northern part of the province, and an allowance for exploration, mineral deposit evaluation and mine development.
Under the new regime proposed by the 2010 Quebec budget, the tax rate will be increased, jumping to 14% for the portion of 2010 occurring after 30 March 2010 (“Budget Day”), 15% for 2011 and 16% for 2012. Moreover, mine operators must now compute annual profit separately for each mine, with certain expenses relating to a specific mine being deductible only against income from that mine. In many cases this change will prevent expenses at one mine from reducing profits at another. Other expenses will be subject to significant limitations on deductibility.
Under the new system for computing annual profit/loss (effective for fiscal years beginning after Budget Day), a mining operator will compute its profits from each mine separately. Where a particular mine has a loss for the year, the loss will be deemed to be zero for most mine operators, so that it does not reduce the mine operator’s overall profit for the year (an exception will be made for “eligible operators”, being those that are not themselves developing mineral resources in reasonable commercial quantities nor are associated with an entity that is doing so). The operator’s “annual profit” (or loss) for the year will then be computed as the sum of annual profits from each mine, less certain deductions permitted from that total. This mine-by-mine approach will cause operations to be less likely to produce an annual loss for the year.
Substantial changes are being made to the allowances and deductions permitted in determining mining profit:
- for property acquired after Budget Day, the depreciation rate is being reduced from 100% to 30% (limited grandfathering exists if the property commenced construction no later than that date or was acquired pursuant to a written obligation existing on that date);
- the processing allowance (intended to limit taxation to the pits-mouth value of the extracted resource) is being reduced, effective Budget Day; and
- the geographic scope of the northern mine allowance is being expanded, and the basis of computation changed from the capital cost of property used there to a fixed dollar amount.
Importantly, the treatment of expenses for exploration, mine development and mine deposit evaluation is being extensively revised. Three new cumulative accounts are being created to track these expenditures:
Cumulative mineral deposit evaluation and mine development expenses after production: this account will include expenses (other than for depreciable property) to bore or excavate a mine shaft or similar underground structure in Quebec after the mine is producing in reasonable commercial quantities, and is tracked separately for each mine. In determining the annual profit from a mine, operators may deduct as an allowance for mineral deposit evaluation and mine development after production the lesser of 30% of the undeducted year-end balance of these expenses for that mine and the annual profit for that mine (determined before this allowance and the processing allowance).
Cumulative mineral deposit evaluation and mine development expenses before production: This account will include expenses incurred to bring a new mine in Quebec into production in reasonable commercial quantities (e.g., excavation, surface clearing, mine shaft boring), if incurred before the mine is producing in reasonable commercial quantities. In computing “annual profit” operators may deduct the undeducted year-end balance of these expenses as an allowance for mineral deposit evaluation and mine development before production; and
Cumulative exploration expenses: This account will include expenses to determine the existence, location or quality of a mineral substance in Quebec, including prospecting, geological studies, and trenching/sampling, but not including expenses included in the other two accounts or relating to a mine producing in reasonable commercial quantities. In computing “annual profit” “eligible operators” (see above) may deduct the undeducted year-end balance of these expenses as an exploration allowance, while others are limited to the lesser of that year-end balance and 10% of annual profit for the year (before this allowance and the immediately preceding allowance).
The deduction limit of cumulative exploration expenses to 10% of profit for most mine operators and the restriction of the allowance for mineral deposit evaluation and mine development after production from a particular mine to annual profit from that mine will significantly reduce the deductions claimable in many cases. Moreover, no post-Budget Day expenses will be eligible for the existing additional exploration allowance. The three new allowances are summarized in the table below:
NEW QUEBEC MINING TAX EXPENSE REGIME
|Cumulative Exploration Expenses (CEE)||Cumulative Mineral Deposit Evaluation & Mine Development Expenses Before Production (Pre-Production CMDEMDE)||Cumulative Mineral Deposit Evaluation & Mine Development Expenses After Production (Post-Production CMDEMDE)|
|Expenses Included||Expenses incurred to determine existence, location or quality of minerals in Quebec, including prospecting, geological studying, trenching and sampling, other than Pre- or Post- production CMDEMDE, and not including expenses relating to a mine producing in reasonable commercial quantities||Expenses incurred to bring a new mine in Quebec into production, including excavation and clearing of surface layers and boring a mine shaft, if incurred before the mine enters production in reasonable commercial quantities||Expenses to bore or excavate a mine shaft, mine haulage way or similar underground structure for a use in a Quebec mine (other than the cost of depreciable property), if incurred after the mine is producing in reasonable commercial quantities|
|Allowance Provided||Exploration allowanceEligible operators may deduct year-end CEE balance; others limited to lesser of that amount and 10% of annual profit||Allowance for mineral deposit evaluation and mine development before productionOperator may deduct year-end Pre-production CMDEMDE balance||Allowance for mineral deposit evaluation and mine development after productionOperator may deduct lesser of annual profit from particular mine and 30% of year-end Post-production CMDEMDE for that mine|
|Deducted From||Annual profit||Annual profit||Annual profit from particular mine|
The credit on duties refundable for losses is also being restricted. Going forward, the credit will be the product of the applicable tax rate for the year (i.e., 16% in 2012 and following) multiplied by the lesser of
- the operator’s adjusted annual loss for that year, and
- the allowance for mineral deposit evaluation and mine development after production deducted for the year (plus, for eligible operators only, 50% of the exploration allowance deducted for the year).
Finally, the rules governing the determination of the gross value of precious stones (diamonds, emeralds, sapphires and rubies) are being revised to establish an appraisal system to determine value before cutting and polishing involving the use of a government-mandated appraiser.
The Quebec 2010 Budget website can be found here. See here for the relevant portions of the budget papers describing the mining tax changes.