May 2013

A taxing budget for miners

Extension and elimination of tax incentives for mining loom large in Canada’s budget

By Herb Mathisen

Described as a snoozer by some national media outlets, Canada’s federal budget was anything but for the mining sector. While the mineral exploration tax credit was extended, and steps were taken to address skills shortages affecting the mining industry, two tax changes might have negative consequences on companies looking to open additional mines or to expand their existing operations.

The budget eliminated the accelerated capital cost allowance (ACCA) and reclassified Canadian Exploration Expense (CEE) within the Canadian Development Expense (CDE) pool. “This is the second budget in a row where they’ve moved to take away some mining-specific tax measures that have been there for many years to incentivize mining investment,” said Pierre Gratton, president and CEO of the Mining Association of Canada. Last year’s budget got rid of the 10 per cent investment tax credit for pre-production mining expenditures.

By recategorizing CEE into CDE, the deduction rate for development expenses like shaft-sinking or overburden removal and stripping during pre-production drops from 100 per cent – the year the expense is incurred – to 30 per cent on a declining balance basis over a number of years. This change will be phased in until fully implemented in 2018. Also, the phasing out of ACCA means that companies can no longer fully deduct mining equipment and machinery purchased during pre-production. Only 25 per cent of these costs will be deductible. The budget, however, extended ACCA for the slumping manufacturing sector and created tax incentives for the biomass and clean energy sectors. “In the budget, the government was saying it was taking these steps on mining to make the tax system more neutral,” said Gratton, “but it’s rather selective neutrality.”

John Gravelle, national mining leader with PricewaterhouseCoopers, said the government gets a failing grade from the mining sector for this budget. “The companies that it affects the most are the ones that already have existing mines in Canada that are profitable

and are then taking their earnings and putting them into developing a second, or third, or fourth mine in Canada,” said Gravelle. “I would have thought you would have wanted to motivate those companies to repeat rather than rethink.”

In today’s difficult market, he continued, miners are pursuing alternative sources of financing that can be expensive. “Because they are going to have to pay taxes sooner rather than later, they are going to leave these high costs of financing outstanding longer, so that is going to hurt their balance sheets,” he explained. “And some of the projects are going to be made uneconomical. It’s going to impact the net asset value of the projects, so some of them that were making the grade, on a return on investment perspective, are not going to meet that anymore.”

The budget was not all bad news, however. While Gratton said he did not have high expectations for infrastructure investments, as the federal government is facing a deficit, the budget did address skills shortages in the mining sector. “It was largely a skills and training budget,” he said. Finance Minister Jim Flaherty announced the government would provide added support for apprenticeships and agreed to partner with provinces and territories to subsidize training for in-demand positions.

One bright spot for the junior sector was the extension of the Mineral Exploration Tax Credit for another year. “It’s very important to the sector,” said Ross Gallinger, executive director of the Prospectors and Developers Association of Canada.

While this measure costs the federal government roughly $80 to $100 million in net revenue, Gallinger said, studies have shown the tax credit raises about $800 million annually for miners. “That’s a pretty substantial piece of capital raised for the sector and it affords keeping exploration in Canada,” he pointed out. “It’s really to get exploration in remote parts of Canada, and jobs and opportunities for northern remote Canadian communities, as well as for First Nations people.”

Gallinger said he also remains hopeful about an extension of the Geo-mapping for Energy and Minerals program, as an announcement was absent in the budget.

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