Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: 1. Why mining taxes exceed resource allowance? 2. Are Ontario mining taxes imposed on a mineral resource extracted a) a tax on income; b) deductible under paragraph 20(1)(v) and Reg. 3900; and c) a deduction in computing resource profits? 3. Are Quebec taxes on surface mineral substances extracted a) not deductible by virtue of paragraph 18(1)(m), and b) a deduction in computing resource profits? 4. Tax treatment of cost of mineral rights purchased?
Position: 1. Generally, provincial mining taxes are significantly less than the 25% resource allowance; 2. a) Yes, b) No and c) No; 3.a) Yes, they are not deductible, and b) No; 4. Canadian development expense if cost is for the purchase of a mineral resource and added to schedule V if cost is for a right to an industrial mineral.
Reasons: 1. rates are imposed under provincial legislation; 2 a) as supported by jurisprudence and previous Rulings' letters that looked at this issue in depth; b) as per wording in Reg. 3900 and definition of "minerals" in Reg. 3900 which excludes a mineral resource, and c) as Reg. 1204(1) wording before paragraph (d); 3.a) meets wording in paragraph 18(1)(m)9II0(B)(III) and b) as Reg. 1204(1) wording before paragraph (d). 4.a) 66.2(5)(e) or capital cost for CCA under Schedule V..
October 21, 2004
Neale Dookie, Team Leader Catherine Bowen
Basic Files Audit 442-1-3 Resources Industry Section
Toronto West Tax Services Office Income Tax Rulings Directorate
P.O. 6000, 5800 Hurontario St. (613) 957-8284
Mississauga, ON
Attention: Siu Lai 2004-008632
Mining taxes and Resource profits
We are writing in reply to your e-mails dated July 19 and 20, 2004 wherein you requested our comments on certain issues that arose as a result of auditing a taxpayer (the "taxpayer"). These issues include the deductibility of Ontario mining taxes and Quebec royalties on surface mineral substances extraction as well as the calculation of resource profits. You also faxed to us on August 19, copies of completed forms upon which the Quebec extraction tax had been calculated by the taxpayer and an exploration agreement with an option to purchase for our comments. Additional information was also provided to us in several other e-mails.
Unless otherwise stated, all statutory references are to the Income Tax Act (the "Act").
A) Resource allowance
While the resource allowance is intended to partially compensate a taxpayer for the non-deductibility of provincial mining taxes and royalties, it is our understanding that in the mining sector the amount of the resource allowance deducted usually exceeds the actual mining taxes paid and as a result, has provided considerable benefit to that industry. Therefore, it is not surprising to find this situation for the taxpayer you are auditing.
B) Ontario mining taxes
As you are auditing the years XXXXXXXXXX of the taxpayer, the comments below do not take into account the draft Income Tax Regulations (the "Regulations") issued June 9, 2003 applicable to taxation years that end after 2002, which will revise the definition of "mineral" currently found in subsection 3900(1) of the Regulations.
You informed us that the taxpayer is paying Ontario mining taxes on income earned from the sale of XXXXXXXXXX extracted in Ontario. The taxes under the Ontario Mining Tax Act are levied on annual profits from a mine in Ontario and are calculated by deducting certain specifically permitted deductions from mining revenue. It is considered to be a provincial income or profits tax because it is incurred after profits have been earned and calculated in accordance with provincial legislation. This will be the case, even if the profits under the provincial legislation are not equal to the company's profits or income as determined for purposes of the Act. These taxes are not deductible by virtue of paragraph 18(1)(a), and not by virtue of paragraph 18(1)(m). This position is indicated in Issue # 33 of the Mining Industry Audit Issues. Taxes on income are not considered to be laid out for the purpose of gaining or producing income, as supported by several court cases including the recent decision of the B.C. Court of Appeal in Teck Corporation v. the Queen, 2004 BCCA 514.
These taxes are also not deductible under paragraph 20(1)(v) and section 3900 of the Regulations. That Regulation is currently limited to income taxes paid on industrial minerals that do not meet the definition of "mineral resource" in subsection 248(1). In the case of the taxpayer, the industrial mineral being extracted meets that definition by virtue of subparagraph (d)(i) thereof (i.e., certification has been received from Natural Resources Canada). Income from mineral resources is eligible for the resource allowance deduction and is, therefore, denied a deduction under paragraph 20(1)(v) in respect of taxes paid on that income.
The Ontario mining taxes cannot be deducted in computing income for income tax purposes. While the resource allowance can be deducted from income earned from the production and initial processing of a mineral resource (as per clause 1204(1)(b)(ii)(A) of the Regulations), Ontario mining taxes are not deducted in computing the "gross resource profits" of the taxpayer determined under section 1204 of the Regulations. As indicated in the mid amble before paragraph (d) of that Regulation, " ... the taxpayer's incomes and losses are computed in accordance with the Act ...".
Quebec royalties are imposed on certain surface mineral substances extracted in Quebec pursuant to section 155 of the Mining Act (R.S.Q. c. M-13.1). Pursuant to Division IV of the Regulation respecting mineral substances other than petroleum, natural gas and brine, this royalty is calculated at a fixed rate per metric ton or cubic metre multiplied by the quantity of mineral substance extracted from the ground. It is paid quarterly and calculated on a Québec Ministère des Ressources naturelles, de la Faune et des Parcs form entitled Quarterly report of surface mineral substances extraction- unconsolidated materials for industrial purposes (in French- Déclaration trimestrielle de substances minérales de surface extraites ou aliénées - matériaux consolidés et tourbe). The form filed by the taxpayer (which you forwarded a copy to us) indicates that the substance on which the royalty is being paid is XXXXXXXXXX (in English).
It is our view that this royalty is of the type referred to in subclause 18(1)(m)(ii)(B)(III) as it relates to the production (or extraction) of a mineral (as defined in subsection 248(1)). As a result, the amount of this tax is not an allowable deduction in calculating the taxpayer's income for income tax purposes by virtue of paragraph 18(1)(m). This royalty should be distinguished from the profits based tax imposed under the Quebec Mining Duties Act (R.S.Q., c. D-15), which was referred to in paragraph 42 of the Teck decision referred to above.
As indicated in our file 9420927 dated August 24, 1994 (a copy of which was faxed to you) concerning the taxpayer, Natural Resources Canada is of the view that the principal mineral extracted by the taxpayer from each of the XXXXXXXXXX (in Ontario), XXXXXXXXXX (in Quebec) and XXXXXXXXXX (in Quebec) deposits is XXXXXXXXXX , in the first two cases from deposits of XXXXXXXXXX and in the last case from deposits of XXXXXXXXXX . As a result, they have expressed the view that all three of these mineral deposits would qualify under subparagraph (d)(iii) of the definition of "mineral resource". Therefore, assuming the income from the production and initial processing of XXXXXXXXXX by the taxpayer in Canada arises from these 3 deposits, then such income would be included in the definition of "gross resource profits" in section 1204 of the Regulations by virtue of clause 1204(1)(b)(ii)(A) thereof for the purposes of determining the amount, if any, of the taxpayer's resource allowance. However, the Quebec royalty referred to above is not an allowable deduction in calculating the taxpayer's "gross resource profits".
D) Exploration Agreement with Option to Purchase
We have reviewed the Exploration Agreement with Option to Purchase effective XXXXXXXXXX between the taxpayer and XXXXXXXXXX Co. Under that agreement, the taxpayer can exercise its purchase option only after expending at least US$XXXXXXXXXX for exploration drilling on the property. The taxpayer made a payment of US$XXXXXXXXXX (C$XXXXXXXXXX) in XXXXXXXXXX to acquire a XXXXXXXXXX% interest in the rights, title and interest in certain mining claims owned by XXXXXXXXXX Co. in Quebec. The taxpayer has informed you that these claims were in respect of a XXXXXXXXXX deposit.
You indicated that the cost of the exploration drilling in XXXXXXXXXX was C$XXXXXXXXXX which was expensed for income tax purposes and the cost of acquiring the mineral rights was added to the taxpayer's cumulative Canadian development expense pool.
In order for the cost of exploring for or acquiring mineral rights to be treated as Canadian exploration expense under subsection paragraph 66.1(6)(f) or Canadian development expense under paragraph 66.2(5)(e), respectively, the mineral must first qualify as a "mineral resource" as defined in subsection 248(1). XXXXXXXXXX can meet this definition only if it qualifies under paragraph (d)(i) of the definition (i.e., it has been certified by the Minister of Natural Resources).
We have no record of either the vendor or the taxpayer receiving such certification for the deposit. Therefore, if the XXXXXXXXXX is contained in a non-bedded deposit, we suggest that the taxpayer request this certification immediately. Such a request should be sent to our office along with an authorization for us to deal with Natural Resources Canada. In addition, a report (which indicates the name of the property, range, lot number, mining claims numbers, location to a municipality, a description of the geology, a description of the exploration program carried out, to what industry the deposit if found would have been sold to and for what purpose) should be submitted with the request. It is preferable that this report be signed by a professional engineer or certified geologist.
Should such certification not be obtained by the taxpayer or it is not possible to do so because the XXXXXXXXXX is contained in a bedded deposit, it will constitute an industrial mineral and the cost of exploring for it should be treated as an operating expense as indicated in paragraph 10 of IT-492, Capital Cost Allowance - Industrial mineral mines. The cost of acquiring the mineral rights for an industrial mineral should be treated as an addition to Schedule V and capital cost allowance can be claimed in accordance with that schedule (see IT-492).
We trust our comments are of assistance.
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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