Budget 2013: changes to the taxation of resource industries 

publication 

March 2013

Tax Bulletin

Budget 2013 proposes a number of significant tax changes affecting the Canadian resource sector, primarily the mining sector.

First, as expected, Budget 2013 proposes to extend the "super flow-through share" program for another year in order to continue to promote the exploration and development of mineral resources in Canada. Second, the Government is proposing to phase out certain tax incentives for the mining sector, which will entail (i) transitioning the treatment of pre-production mine development expenses from being "Canadian exploration expenses" to being "Canadian development expenses", and (ii) phasing out an accelerated capital cost allowance for assets acquired for use in new mines or eligible mine expansions. The removal of such tax incentives is intended to comply with Canada's G-20 commitments to phase out fossil fuel subsidies.

More broadly applicable to the resource sector, Budget 2013 also proposes to enact measures to ensure that a reserve cannot be claimed by a taxpayer related to the cost of future reclamation obligations.

extension of super flow-through share program

Budget 2013 proposes to extend the "super flow-through share" program for an additional year. The super flow-through share program was initially introduced in October 2000 in response to a severe downturn in mineral exploration in Canada. The program had expired at the end of 2005 and was re-introduced in the 2006 Budget in respect of flow-through shares issued pursuant to agreements made after May 1, 2006 and on or before March 31, 2007. The program was extended for additional one-year periods in each of the 2007 to 2012 Budgets.

Canada's flow-through and super flow-through share programs provide tax incentives to promote the exploration and development of mineral resources in Canada, particularly by encouraging new equity investment in junior mining companies. Under Canada's flow-through share program, a company is permitted to renounce or "flow-through" certain expenses associated with its Canadian exploration activities to investors. In turn, investors can generally deduct such expenses in calculating their own taxable income.

The super flow-through share program provides an additional benefit to those who invest in flow-through shares. Under this program, an investor may claim a 15% tax credit in respect of certain grassroots exploration expenses incurred by the issuer of the shares in Canada and renounced to the flow-through shareholder. The tax credit may be applied to reduce certain federal income taxes otherwise payable by the investor. Grassroots mining expenditures include expenses incurred in conducting certain mining exploration activities for the purpose of determining the existence, location, extent or quality of a mineral resource.

Budget 2013 proposes to extend the super flow-through share program to apply in respect of flow-through share agreements entered into on or before March 31, 2014. Under a "look-back" rule, funds raised under the terms of the program in the first three months of 2014 may be used to support eligible exploration up to the end of 2014.

phase-out of mining tax incentives

transition of pre-production mine development expenses to a lower value expenditure pool

Generally, pre-production mine development expenses are currently treated as "Canadian exploration expenses" (CEE) and may be deducted in full in the year incurred (or carried forward to the extent not deducted). In contrast, expenses that are treated as "Canadian development expenses" are deductible at a rate of 30 percent per year on a declining-balance basis.

Budget 2013 proposes to transition over the next 5 calendar years the treatment of pre-production mine development expenses from being "Canadian exploration expenses" to being "Canadian development expenses" as follows: 

Year 2013 2014 2015 2016 2017 after 2017
CEE proportion 100% 100% 80% 60% 30% -
CDE proportion - - 20% 40% 70% 100%
 
In recognition of the long timelines involved in developing mines, the existing CEE treatment will apply to pre-production mine development expenses incurred before 2017 either (i) under a written agreement entered into by the taxpayer before March 21, 2013, or (ii) as part of the development of a new mine where either the construction of the new mine, or the engineering and design work for the construction of the new mine (as evidenced in writing) was started by, or on behalf of, the taxpayer before March 21, 2013. Activities such as obtaining permits or regulatory approvals, conducting environmental assessments, community consultations, impact benefit studies and similar activities will not be considered construction or engineering and design work for these purposes.

elimination of accelerated capital cost allowance for certain mining assets

A taxpayer that acquires certain assets for use in new mines or eligible mine expansions is generally entitled to not only claim a deduction for capital cost allowance at a rate of 25% on a declining balance basis but also an additional allowance that allows the taxpayer to deduct an amount up to 100% of the remaining cost of such assets (not exceeding income from the mining project). The additional allowance effectively ensures that taxation on income from the mining project is deferred until the cost of the eligible assets has been recovered.

The accelerated CCA has been provided since 1972. In 1996, the accelerated CCA allowance was extended to in-situ oil sands projects (which use oil wells rather than mining techniques to extract bitumen). Pursuant to changes announced in Budget 2007, the accelerated CCA for oil sands projects - both mining and in-situ – is being phased out over the 2011-2015 calendar years.

Budget 2013 proposes to phase out the accelerated CCA for all other mining projects over the 2017-2020 calendar years. During the phase out, taxpayers will be allowed to claim a percentage of the amount of the additional allowance otherwise permitted under the existing rules as follows:

Year 2013-2016 2017 2018 2019 2020 after 2020
percentage 100% 90% 80% 60% 30% -

In recognition of the long timelines involved in developing mines, the existing additional allowance will be maintained for eligible assets acquired before 2018 either (i) under a written agreement entered into by the taxpayer before March 21, 2013, or (ii) as part of the development of a new mine where either the construction of the new mine, or the engineering and design work for the construction of the new mine (as evidenced in writing) was started by, or on behalf of, the taxpayer before March 21, 2013. Activities such as obtaining permits or regulatory approvals, conducting environmental assessments, community consultations, impact benefit studies and similar activities will not be considered construction or engineering and design work for these purposes.

narrowing the reserve for future services

A taxpayer can generally claim a reserve for amounts received for services that may reasonably be expected to be rendered after the end of the applicable taxation year. The 2013 Budget Papers state that the reserve is not intended to capture services expected to be rendered after the end of the applicable taxation year that relate to future obligations of the taxpayer (other than to a customer) arising from the services provided to the customer. An example provided in the Budget Papers of such a scenario is where a waste disposal company charges its customers a fee to cover future costs of reclaiming its landfill.

Budget 2013 proposes to eliminate the reserve in respect of any reclamation obligation for amounts received on or after March 21, 2013, provided that such reserve will remain available for amounts received before 2018 that are directly attributable to a reclamation obligation, that were authorized by a government or regulatory authority before March 21, 2013 and that are received under a written agreement between the taxpayer and another party (other than a government or regulatory authority) that was entered into before March 21, 2013 (and was not extended or renewed on or after March 21, 2013).

Taxpayers that would have previously claimed the reserve may wish to consider establishing and contributing to a "qualifying environmental trust", which contributions would be deductible subject to detailed rules in the Income Tax Act (Canada). 

by Michael Friedman, Peter Botz and Ryan Morris
 
a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2013