Canada Gazette

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to section 221 (see footnote a) of the Income Tax Act (see footnote b), hereby makes the annexed Regulations Amending the Income Tax Regulations (Mining Taxes).

1. Section 3900 of the Income Tax Regulations (see footnote 1) and the heading "MINING TAXES ON INCOME" before it are replaced by the following:

"income" of a taxpayer for a taxation year from mining operations in a province means the income, for the taxation year, that is derived from mining operations in the province as computed under the laws of the province that impose an eligible tax described in subsection (3). (revenu)

"mine" includes any work or undertaking in which a mineral ore is extracted or produced and includes a quarry. (mine)

"mineral ore" includes an unprocessed mineral or mineral-bearing substance. (minerai)

(i) mineral ore (other than iron ore) to the prime metal stage or its equivalent, and

(ii) iron ore to a stage that is not beyond the pellet stage or its equivalent. (exploitation minière)

"non-Crown royalty" means a royalty contingent on production of a mine or computed by reference to the amount or value of production from mining operations in a province but does not include a royalty that is payable to the Crown in right of Canada or a province. (redevance non gouvernementale)

"processing" includes all forms of beneficiation, smelting and refining. (transformation)

(2) For the purpose of paragraph 20(1)(v) of the Act, the amount allowed in respect of taxes on income from mining operations of a taxpayer for a taxation year is the total of all amounts each of which is an eligible tax paid or payable by the taxpayer

(a) on the income of the taxpayer for the taxation year from mining operations; or

(b) on a non-Crown royalty included in computing the income of the taxpayer for the taxation year.

(a) a tax, on the income of a taxpayer for a taxation year from mining operations in a province, that is

(i) levied under a law of the province,

(ii) imposed only on persons engaged in mining operations in the province, and

(iii) paid or payable to

(A) the province,

(B) an agent of Her Majesty in right of the province, or

(C) a municipality in the province, in lieu of taxes on property or on any interest, or for civil law any right, in property (other than in lieu of taxes on residential property or on any interest, or for civil law any right, in residential property); and

(b) a tax, on an amount received or receivable by a person as a non-Crown royalty, that is

(i) levied under a law of a province,

(ii) imposed only on persons who hold a non-Crown royalty on mining operations in the province, and

(iii) paid or payable to the province or to an agent of Her Majesty in right of the province.

2. Section 1 applies to taxation years that end after 2002, except that, for taxation years that begin before 2007, the amount allowed for the purpose of paragraph 20(1)(v) of the Act under subsection 3900(1) of the Regulations, as enacted by section 1, in respect of an eligible tax paid or payable in respect of which no amount would be deductible but for section 1, may not exceed the amount that provides the taxpayer with a deduction, in computing the taxpayer's income under the Act for the taxation year, that is equal to the total of

(a) 10% of the amount of the eligible tax paid or payable by the taxpayer on the taxpayer's income, for the taxation year, from mining operations multiplied by the proportion that the number of days in the taxation year that are in 2003 is of the number of days in the taxation year;

(b) 25% of the amount of the eligible tax paid or payable by the taxpayer on the taxpayer's income, for the taxation year, from mining operations multiplied by the proportion that the number of days in the taxation year that are in 2004 is of the number of days in the taxation year;

(c) 35% of the amount of the eligible tax paid or payable by the taxpayer on the taxpayer's income, for the taxation year, from mining operations multiplied by the proportion that the number of days in the taxation year that are in 2005 is of the number of days in the taxation year;

(d) 65% of the amount of the eligible tax paid or payable by the taxpayer on the taxpayer's income, for the taxation year, from mining operations multiplied by the proportion that the number of days in the taxation year that are in 2006 is of the number of days in the taxation year; and

(e) 100% of the amount of the eligible tax paid or payable by the taxpayer on the taxpayer's income, for the taxation year, from mining operations multiplied by the proportion that the number of days in the taxation year that are in 2007 is of the number of days in the taxation year.

On November 7, 2003, royal assent was given to An Act to Amend the Income Tax Act (Natural Resources) ("Bill C-48"). Bill C-48 implemented a series of improvements to the income taxation of resource income announced in the 2003 budget. It reduced the corporate income tax rate applicable to resource income from 28 percent to the general corporate rate of 21 percent. The reduction in the tax rate is being phased in over a five-year period ending in 2007. Bill C-48 also phases out the resource allowance deduction and phases in a deduction for Crown resource royalties over the same five-year period. These amendments to Regulation 3900 are intended to ensure, as announced in the 2003 budget, that a deduction for mining taxes imposed under a variety of provincial statutes will be phased in over the same five-year period.

Paragraph 20(1)(v) of the Income Tax Act (the "Act") provides a deduction for mining taxes allowed by Regulation 3900. Currently, Regulation 3900 applies only to industrial minerals such as sand, gravel and asbestos. To implement the general deduction for mining taxes, Regulation 3900 is being expanded by repealing the definition "mineral" referred to in that Regulation, thereby ensuring that the broader meaning of mineral (as defined in subsection 248(1) of the Act) will apply.

The amendments extend the application of Regulation 3900 by removing a prorating formula that reduces the deduction for mining taxes to the extent that the taxpayer's mining income as determined for federal income tax purposes is less than the taxpayer's mining income as determined for provincial mining tax purposes. The prorating formula, which limits the extent of the federal deduction based on the relative scope of the provincial mining tax base and the federal income tax base, does not serve a current federal policy objective. Nonetheless, the federal government will continue to monitor provincial mining tax regimes and will be attentive to any situation where provincial income tax rates on resource income are reduced below the level of tax applied to other sectors if those reductions are undertaken as part of a strategy to replace non-deductible taxes on resource income with deductible resource-based charges.

The amendments also expand the deduction for mining taxes to include a deduction for provincial taxes on certain non-Crown mining royalties. The extension of the deduction for taxes imposed on non-Crown mining royalties is limited to taxes on royalties that are contingent on production or computed by reference to the value of production from mining operations in the province.

The amendments to Regulation 3900 apply to taxation years that end after 2002. The deduction for mining taxes is being phased in over a five-year period consistent with the treatment of Crown royalties on oil and gas production.

The amendments to Regulation 3900 are necessary to ensure that a deduction for provincial mining taxes is phased in over the same time period as the phase-in of a deduction for Crown royalties under Bill C-48, both coinciding with the phase-out of the resource allowance under that Bill. The amendments are considered the most effective means of achieving this result.

A detailed discussion of the rationale for the resource tax changes is set out in a technical paper entitled, "Improving the Income Taxation of the Resource Sector in Canada", issued by the Minister of Finance on March 3, 2003.

While the resource allowance generally operates as a proxy for Crown royalties and mining taxes, it is an arbitrary and complex calculation that does not reflect the actual costs paid by firms. The new deduction for royalties and mining taxes paid is intended to recognize actual costs, thereby treating all resource projects in a more comparable fashion. Investment decisions will therefore be based more consistently on the underlying economics of the project. The new structure will be simpler, streamlining tax compliance and administration, and sending clearer signals to investors.

The fiscal cost of the deduction for mining taxes must be measured against the increase in federal revenue from the elimination of the resource allowance deduction. In this respect, mining taxes paid have generally been less than the deductions for the resource allowance in the mining sector in recent years. When all elements of the resource tax changes are fully phased in, including the reduction of the corporate tax rate, the annual revenue cost to the federal government is estimated to be about $260 million per year.

This proposal to repeal the definition of "mineral" in Regulation 3900 was set out in the draft regulations (natural resources) released on June 9, 2003 when Bill C-48 was introduced. The other amendments contained in this package were released by the Department of Finance on December 21, 2004. The amendments were pre-published in the Canada Gazette, Part I, on December 24, 2005. They reflect the results of consultations with the mining industry, mining tax specialists and the Canada Revenue Agency. The amendments were not modified following their pre-publication in the Canada Gazette.

The provision of a deduction for mining taxes in place of the resource allowance deduction is intended to make the income tax system more neutral by ensuring that the deduction for income tax purposes reflects the cost paid by firms to access natural resources rather than an arbitrary amount calculated under the resource allowance formula. Allowing a deduction only for costs paid treats costs more consistently, both across projects and between the resource sector and other sectors of the economy. In this way, the changes will result in investment decisions being based more consistently on the underlying economics of each project, leading to more efficient development of Canada's resource base. Accordingly, no negative environmental impact is anticipated as a result of the amendments to Regulation 3900. Providing tax recognition only for actual costs could improve environmental outcomes by removing any implicit subsidization provided by the resource allowance.

The Income Tax Act provides the necessary compliance mechanisms. These mechanisms allow the Minister of National Revenue to assess and reassess taxes payable, conduct audits and seize relevant records and documents.

Daryl Boychuk
Tax Legislation Division
Department of Finance
L'Esplanade Laurier
140 O'Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: (613) 992-0049