Quebec Premier Pauline Marois addresses an audience last November. Her Parti-Québécois government made big promises to increase mining royalties in the lead up to last fall’s election, but the new royalty system released in May has come up short for both industry and environmentalists | Courtesy of Miguel Legault
The reception of Quebec’s new mining tax regime, announced on May 6, was rather chilly from both industry and civil society. The Parti Québécois (PQ) had
promised hundreds of millions of dollars in increased tax revenues from mining companies during its last electoral campaign but now appears content with a
more modest $50-million increase, estimated for 2015. And instead of padding the province’s coffers, some in the mining industry are saying the change will
divert investment to other jurisdictions.
“We are disappointed to see that, once again, the rules of the game have been changed,” said Josée Méthot, president of the Quebec Mining Association.
“When an investor makes a deal, he does so according to an anticipated rate of return.” Since 2010, she noted, Quebec has fallen from first to 11th in the
Fraser Institute’s annual ranking of mining jurisdictions. She added that Quebec is far from Asian markets, has high production costs, and is the most
heavily taxed province in Canada. “Now, the government has just added to the investment cost.”
But civil groups are unsympathetic to the industry’s complaints. “I am under the impression that they got everything they wanted,” said Henri Jacob,
president of Action Boréale, an environmental conservation group from Abitibi, a region that hosts half of Quebec’s operating metal mines. “The government
had promised nearly $400 million in increased tax revenues,” he said. “It is now speaking of $50 million, one eighth of what was originally planned.”
The new regime, which will come into effect January 2014, introduces two tax options. The first is a tax on production value, and companies will have to
pay as soon as they begin extracting minerals from the ground – whether operations are profitable or not. The PQ had originally planned a five per cent tax
on gross sales. However, that has been lowered to a range between one to four per cent, depending on value, and the tax base itself has been replaced with
production value at the mine mouth, which refers to the mineral’s value when it comes out of the ground rather than when it reaches market.
All processing, administrative and commercialization expenses will thus be deducted from gross sales values before being taxed.
The PQ has also backtracked on its rent-based tax commitment that was originally planned to kick in as soon as a company’s internal rate of return reached
eight per cent. (This tax tool is currently being used in Australia.) As its second option, the government will instead base taxes on profit margins. The
profit-based tax rate will be maintained at 16 per cent but will increase as soon as a company reaches a 35 per cent profit margin. Companies will pay
either the production or profit-based tax option, depending on which system brings the government the most revenue.
According to René Albert, tax services partner at PricewaterhouseCoopers, it is clear that these new tax tools will have an impact on mining projects,
especially those with short lifespans. “Projects with four- to six-year lifespans, common in the gold industry, will be affected significantly,” he said.
“They could even be endangered.”
Short lifespan projects need to reach high rates of return in order to justify their investment cost. With the new profit-based tax kicking in when the
rate of return exceeds 35 per cent, rates then begin to increase in proportion to rates of return, reaching 17.8 per cent for a 50 per cent rate of return,
and then 21.2 per cent for a 75 per cent rate of return.
But the new regime is not all bad news. In an effort to retain secondary mineral processing in the province, the government has increased its treatment tax
credit from 13 to 20 per cent for companies that have smelting and refining assets in Quebec. Also, companies that have had to pay royalties on production
in years where they did not make a profit will be able to recover part of those royalties as tax credits on their profit-based tax payments later on.
Overall, the effects of the new regime will be significant in periods where profits are high, according to Albert. Otherwise, it is still too early to make
any general assessment. “Only experience will tell,” he said. “It will depend on metal prices. But for now, it is clear that the production-based tax will
have an impact on small-scale, less profitable projects. It could make a difference in where investors want to invest.”
The new regime will come into force in January 2014, but will eventually need to be approved by the national assembly, where the PQ holds a minority
government. As is often the case in Quebec, this could happen many months or even years after the regime has entered into force.