Canada's Mining Companies Under Tax Threat From Finance Ministry

by Mike Godfrey, Tax-News.com, New York

05 September 2001

The Canadian Department of Finance has signalled its intention to implement the second key recommendation in a 1998 study carried out by economist Jack Mintz on Canada's corporate tax system. The first recommendation, to reduce corporate taxes across the board, was addressed in last year's budget, which will reduce the headline rate of corporation tax to 21% by 2005.

The basic federal rate of corporate income tax at present is 38%, which is reduced to 28% by an abatement on a corporation's taxable income in a province or territory. The government proposes to further reduce this rate to 21% for all corporations except investment companies by 2005. Provincial and territorial corporate tax rates are added to the 28% basic rate, and vary between 5% and 17%.

The second key recommendation was that there should be a neutral tax system in which all industries share the same tax burden. Apart from investment companies, the main stand-out from this perspective is the resource sector (eg mining companies) which currently benefit from two main concessions, one being the 'resource allowance' which is complex but basically allows them to deduct 25% of profits plus certain royalty payments before tax is applied, and the second being accelerated capital allowances, which permit most capital expenditure to be allowed against income in the tax calculation.

Paul Martin, the Minister of Finance, is proposing to eliminate both concessions and harmonise the corporate tax rate across all sectors. But the resource sector says that it currently pays well under 21% corporate tax on a like-for-like basis, and that repeal of the two key tax measures will damage Canadian companies already struggling in the face of intense foreign competition, and will curtail potential investment. Canada has already lost investment and development to other jurisdictions where the tax regime is more attractive, say the companies, which want to keep their concessions and have access to the 21% rate. Canadian mineral exploration spending has fallen nearly 40% to $502-million in 2000 from $820-million in 1997.

"We have modelled numerous options . . . none leave the mining industry better off," said Gordon Peeling, Mining Association of Canada (MAC) president and chief executive. A PricewaterhouseCoopers study, commissioned by the mining sector, examined a number of options presented by Ottawa and concluded the industry would generally have to pay a corporate tax rate of 13% to compensate for the loss of the key tax provisions. "We don't know what will happen but they (Finance) are continuing to look at the tradeoff," Mr. Peeling said. "If we do move forward with the model they have proposed, we're going to see a significant number of losers."

The repeal of the two tax measures would affects companies in different ways, depending on their capital structure and the age profile of their investments. Companies with relatively mature investments would be better off with the 21% rate because they no longer have much capital cost to deduct, while companies just beginning major investment projects would be crippled by removal of the concessions. A mining industry economist pointed out that many recently-initiated projects, such as the recent development of diamond mines in the north are key to improving the economic opportunities for aboriginal communities in the north.

Negotiations between the Government and the resource sector have been proceeding at a glacial pace, and Mr Martin's announcement is no doubt intended to concentrate the minds of mining company negotiators as budget time rolls around.

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