June/July 2011

MAC Economic Commentary

Federal Budget 2011 and the mining industry

By Paul Stothart

Finance Minister Jim Flaherty tabled federal Budget 2011 on March 22 – the sixth budget delivered by the Conservative government – at a time when the Canadian resource economy was performing strongly. Mineral prices continued to be driven to strong levels by Chinese demand, and oil prices were escalating due to global economic uncertainty and turmoil in the Middle East. Canadian employment numbers had returned to pre-recession levels and the budget projected significant increases in tax and other revenues.

In the lead-up to the budget, the opposition Liberals had indicated their lack of confidence in the government, while the Bloc Quebecois had demanded $2.2 billion for Quebec as HST compensation and the NDP sought support for seniors and other programs. The budget was judged by the parties to be lacking in these and other respects. The non-confidence contempt of Parliament motions presented the same week added a further backdrop to the decision by the opposition parties to oppose the budget. The Conservative government was defeated on the contempt-of-Parliament motion, although subsequently returned to Ottawa with a strong majority mandate in the May 2 federal election.

While the March 22 budget was not passed, all elements of the budget were re-introduced when the government tabled its new federal budget on June 6. The growth projections were also the same as those in the earlier budget. The main areas that were revised do not relate to business, rather they include plans to phase out the per-vote public support of federal parties, and an allocation of $2.2 billion in HST compensation to Quebec. The measures that are most relevant to the mining sector in Budget 2012, include the following:

• The temporary 15 per cent Mineral Exploration Tax Credit is an incentive available to individuals who invest in flow-through shares that are used to finance mineral exploration. The budget proposed to extend the credit for an additional year, until March 31, 2012. The structure of this tool means that funds raised with the credit during the first three months of 2012 can support eligible exploration until the end of 2013.

• Two years ago, the federal Crown corporation, Export Development Canada, was granted powers to provide financing support to Canadian exporters in the domestic market. The budget extended these temporary domestic financing powers until March 2012 while the government reviews EDC’s regulatory framework.

• The budget set aside $150 million towards construction of an all-season road between Inuvik and Tuktoyaktuk to effectively complete the Dempster Highway. This project has been identified as a priority by the Northwest Territories government and would contribute to economic and social development in the North.

• Budget 2011 proposed to “eliminate fossil fuel subsidies” by reducing the 30 per cent deduction rates for intangible capital expenses in oil sands projects to align them with the 10 per cent rate already applicable in the conventional oil and gas sector. The budget also aligned deductibility rates for pre-production development expenses of oil sands mining projects with the 30 per cent rate that already exists for in situ projects. This measure also applies to pre-production development expenses in respect to oil shale mines.

• The budget outlined an India Engagement Strategy that builds around ongoing free trade negotiations to include a branding strategy, market development support, a research centre and academic networks.

• Ridley Terminals, a Crown corporation operating a bulk materials handling terminal in Prince Rupert, B.C., has significantly increased its business volumes in recent years and is approaching capacity. Budget 2011 formalized the authority for the terminal to borrow from capital markets so it can proceed with facility expansion plans.

• Budget 2011 renewed funding ($870 million over two years) for the government’s existing clean air agenda, which includes support for regulatory activities in climate change, air quality, energy efficiency and energy retrofit, among other activities. The budget also provided $200 million over two years for renewal of the Chemicals Management Plan and $68 million to remediate contaminated sites for which the government is responsible.

• The budget did not reverse or halt the schedule of corporate income tax reductions, which in effect means that the corporate tax rate would continue from 16.5 per cent at present towards a 15 per cent level by 2012.

In MAC’s view, these measures enhance what is a relatively positive mining investment environment in Canada. However, we also believe the federal government should start to address the federal deficit situation. Past decades have shown that weaning governments off debt financing can be a difficult political task.The last time Canada entered a deficit situation, it took 22 years to return to a balanced budget and several more years to restore the country’s debt-to-GDP ratio to a position that instilled confidence on the part of private investors. Given the looming challenge of an aging society, with increased demands on healthcare and other services, the government must move strongly to avoid a repeat of this situation.

Paul Stothart
Paul Stothart is vice-president, economic affairs, at the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.

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