- News Release 2004-083 -

Explanatory Note

Taxes on Income from Mining Operations

ITR
3900(1)

Paragraph 20(1)(v) of the Act provides that, notwithstanding paragraphs 18(1)(a), (b) and (h), a taxpayer may deduct in computing income such amount as is allowed by regulation in respect of taxes on income from mining operations. Section 3900 of the regulations (“Regulation 3900”) defines the amount allowed in respect of taxes on income from mining operations for the purpose of paragraph 20(1)(v).

Since 1974, Regulation 3900 has been limited to taxes paid on income from the mining of industrial minerals, such as gravel, sand and asbestos. As part of its plan to provide a deduction for all mining-specific taxes imposed by the provinces, the Government is proposing to expand the scope of Regulation 3900. In furtherance of this objective, draft regulations dated June 9, 2003 contained a proposal to repeal the definition “minerals” in Regulation 3900 effective for taxation years that end after 2002, with the result that the broader definition “mineral” in subsection 248(1) of the Act would apply for the purpose of Regulation 3900. The proposed amendments to Regulation 3900 released today encompass the June 2003 proposal and include new proposals intended to simplify the application of this provision.

ITR
3900(1)

Proposed subsection 3900(1) provides that the amount allowed as a deduction in respect of taxes on income from mining operations of a taxpayer is the total of all amounts each of which is an eligible tax paid or payable by the taxpayer on the taxpayer's income from mining operations or on a non-Crown royalty included in the taxpayer’s income. Unlike existing subsection 3900(1), new subsection 3900(1) does not require an eligible tax to be reduced if the provincial mining tax base exceeds the mining tax base as computed under the Income Tax Act.

ITR
3900(2)

Proposed subsection 3900(2) defines an eligible tax as either a tax on the income of a taxpayer from mining operations or a tax on an amount received or receivable by a taxpayer as a non-Crown royalty. To qualify as an eligible tax, the tax must be imposed only on persons engaged in “mining operations” or on persons who hold “non-Crown royalties” as those terms are defined in new subsection 3900(3).

ITR
3900(3)

Proposed subsection 3900(3) contains the definitions that are relevant for the purpose of Regulation 3900 and includes revised definitions of “income” from mining operations and “mining operations” as well as a new definition “non-Crown royalty.”

The revised definition “income” from mining operations expressly provides that it is the income derived from mining operations as computed under the law of the province imposing the tax. In this respect, it is important to note that a tax would not be an eligible tax and, therefore, would not be deductible under paragraph 20(1)(v) if the tax were imposed on income derived from sources other than mining operations.

“Mining operations” are currently defined as the extraction and production of mineral ore from the mine and on-site processing of the mineral ore. This definition will be expanded to include any processing that occurs to the prime metal stage or, in the case of iron ore, to the pellet stage. This amendment is being proposed in recognition that the income calculations for existing provincial mining taxes may include earnings from processing, although in some provinces, a proxy for these earnings, in the form of an allowance, is fully or partially deducted in computing the mining tax base.

The proposed amendments to Regulation 3900 apply to taxation years that end after 2002. The deduction for eligible taxes on income from mining operations and non-Crown royalties is being phased-in over a five-year period consistent with the treatment of Crown charges described in paragraph 18(1)(m) of the Act. However, the phase-in requirement only applies to eligible taxes paid or payable in respect of minerals obtained from a mineral resource and, therefore, does not affect the deductibility of taxes that were previously fully deductible under Regulation 3900.

- News Release 2004-083 -