Québec Budget 2016-2017 Announces Amendments to the Mining Tax Act and to the Refundable Tax Credit for Resources
A number of mining-related (and largely taxpayer-friendly) amendments were introduced by the Québec Government as part of its 2016-2017 Budget. The purpose of this article is to provide an overview of these amendments and their expected impact on companies engaged in mining activities in Québec.
1. Mining Tax Changes
Adjusted Annual Profit
Very generally, the Mining Tax Act (Québec) (the “Mining Tax Act”) imposes a “toll charge” on operators (taxpayers, for the purposes of the Mining Tax Act) who cease all activities related to their “mining operation”, and consequently cease to be subject to Québec mining tax. This “toll charge” is imposed by deeming such an operator to dispose of all its depreciable property for an amount equal to the lesser of the property’s cost or its fair market value. As such, the operator is required to include/deduct in its “annual earnings” (which are relevant in computing its “annual profit” and thus, its Québec mining tax) for the fiscal year, any recaptured depreciation/terminal loss realized as a result of the deemed disposition. This inclusion or deduction may affect the operator’s “profit margin” for mining tax purposes in an artificial manner (since the relevant recaptured depreciation or terminal losses represent notional, rather than actual profits/losses), and in turn have an impact on the rate of mining tax that the operator pays. This is because under Québec’s new “graduated rate” system, operators pay a higher rate of tax on segments of their annual profits representing higher levels of profitability.
In order to eliminate the distortive impact of the deemed disposition described above, and effective for any fiscal year beginning after December 31, 2013, the Mining Tax Act will be amended so that an operator may elect to rely on its “adjusted annual profit”, rather than its annual profit in determining its annual profit margin for the fiscal year ending immediately before it ceases its mining activities. An operator's adjusted annual profit will be equal to the operator's annual profit for a fiscal year, without taking into account any amount included in its “annual earnings” as recaptured depreciation or deducted as a terminal loss reasonably attributable to the operation of the mine.
Tax Deferral and Cessation of Operations
The Mining Tax Act provides for a “rollover” (disposition by the vendor and acquisition by the purchaser for an amount equal to the tax cost of the relevant asset) of depreciable property transferred to a related person. The transferor is therefore not required to include any recapture in its annual earnings for the fiscal year of the transfer. This rollover applies regardless of whether or not the transferee is an operator. However, a person who is not an operator is not a taxpayer for the purposes of the Mining Tax Act. Thus, where the transferee is not an operator, the mining tax on the amount of recapture that was not included in the operator’s annual earnings is lost indefinitely (i.e. no recapture will be realized and taxed when the asset is eventually sold). In order to address this issue, and effective for transfers on or after March 17, 2016, the Mining Tax Act will be amended so that the rollover treatment will only be available when the purchaser of the property is an operator (and therefore subject to Québec mining tax).
Another change regarding the tax-deferral for related-party transfers relates to its interaction with the deemed disposition described in the preceding section. An operator may be considered to have ceased to carry on activities related to its mining operation as a result of a transfer of all of its assets on a tax-deferred basis to a related person. This creates an apparent conflict: the rollover provision suggests that the operator is deemed to dispose of its depreciable property for an amount equal to its tax cost, and the deemed disposition upon cessation of activities provision suggests that the disposition is deemed to occur at fair market-value (in which case, no rollover is available).
In order to address this conflict, the Mining Tax Act will be amended in order to deem an operator who has ceased to carry on activities related to its mining operation as a result of a transfer of all of its assets on a tax-deferred basis to a related party who is also an operator, to have disposed of the property on a rollover basis. This amendment will apply to dispositions of property as of March 17, 2016, and will also apply on an elective basis to dispositions occurring after May 5, 2013.
Valuation of Gemstones
The Mining Tax Act requires that the gross value of the annual output of gemstones of an operator for a fiscal year be determined by both the operator and a valuator engaged by the Minister. The legislation currently provides that an operator is bound to reimburse the Minister for the fees paid to this valuator. The Mining Tax Act will be amended so that an operator will no longer be required to reimburse the Minister for such fees. A new rule will also be introduced to require an operator to provide the facilities and equipment, other than computer equipment, enabling the valuator to value the gemstones.
These changes will apply for fiscal years ended after March 17, 2016.
2. Refundable Tax Credit for Resources:
Very generally, a “qualified corporation” (i.e., a corporation that has an establishment and carries on a business in Québec, except for a corporation that is exempt from tax or a Crown corporation) that incurs expenses related to certain resources may claim a refundable tax credit at a rate of up to 31% of the amount of such expenses. This rate varies according to a number of parameters, including the type of resource to which the expenses relate (mining, oil or natural gas, renewable energy, cut stone, etc.), the place where the expenses are incurred (Near North, Far North, or elsewhere in Québec) and whether the corporation exploits a mineral resource or an oil or gas well.
With respect to expenses relating to mining resources incurred in the Near North or Far North of Québec, the Taxation Act (Québec) will be amended to increase the applicable rates. Consequently, these rates will increase from 31% to 38.75% if the corporation does not exploit a mineral resource or an oil or gas well, and from 15% to 18.75% in other situations. This constitutes a return to the rates that were previously in effect, and that had been decreased following the 2014-2015 Budget.
This amendment will apply to eligible expenses incurred after March 17, 2016.
 Segments representing a profit margin of between 0% and 35% are subject to tax at a rate of 16.0%, segments representing a profit margin of between 35% and 50% are subject to tax at a rate of 22.0%, and segments representing a profit margin of over 50% are subject to tax at a rate of 28.0%.
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