May 2013

Quebec proposes raising royalty rates

Industry braces for impacts of further mining tax increases

By Peter Diekmeyer

Members of Quebec’s mining industry raised the alarm over proposed royalty increases for the sector at two separate mining forums in Montreal this past March. The Parti Québécois campaigned on the promise of raising mining royalties in last fall’s election. Now in power, the party floated two main proposals in the weeks leading up to its Forum sur les Redevances Minières, held at Hautes études commerciales (HEC) Montreal on March 15.

The first option is a royalty based on a percentage of total production value, with five per cent as the suggested rate. The second is a supplemental tax, which would either be progressive or kick in once a certain profit threshold was reached and would reflect rising resource values. Currently, mining companies in Quebec pay 16 per cent on profits.

“Mining royalty and tax regimes are being reviewed everywhere,” said Yvan Allaire, chair of the Institute for Governance of Private and Public Organizations and advisor to the province on this issue. “[The challenge] is balancing maximization of fiscal receipts and durable economic benefits for citizens and the state with the right of companies to a fair return.”

Industry reaction to the proposed changes has been almost uniformly negative. Players in the mining sector gathered at their own public forum, organized by La Fédération des chambres de commerce du Québec, and law firms KPMG Secor and Fasken Martineau, days before the province’s event to publically discuss the impacts of proposed changes to the system. “Adding new taxes in this way is not a good idea,” said Chuck Jeannes, president and CEO of Goldcorp, which is in the midst of developing its Éléonore gold project near James Bay. “Such a move would harm the province’s interests over time, as businesses reassess mine expansion decisions and make new comparisons regarding competitive investment locales.”

“The proposed new taxes would make Quebec the highest tax place that we do business, ahead of Ontario, Mexico and even Argentina,” added Jeannes. “My message to the government would be: ‘Don’t kill the next Éléonore project.’”

Nochane Rousseau, a tax expert at PricewaterhouseCoopers, said ranking Quebec miners’ tax burden in comparison with those in other jurisdictions is difficult because companies also pay federal and provincial corporate taxes, along with other levies like payroll taxes. He added that new measures could hamper investment, however. “We are definitely heading into the higher end, where investors will be demanding increasingly significant risk premiums.”

Bryan Coates, vice-president of finance at Osisko, which operates the Canadian Malartic gold mine in the Abitibi-Témiscamingue region of Quebec, said increasing royalties could have unintended consequences. “Governments need to be careful about making changes, because if they do, they could actually lose revenues,” said Coates. “Royalties are just a small percentage of what Quebec collects from mining companies, which also includes significant payroll and corporate taxes. However, if they grab too much on one end, they could end up hampering investment, thus losing even more overall.”

Ironically, as the government calls for a long-term deal with industry, this is not the first time that the rules of the game have been changed. In 2010, the Charest government raised the mining royalties tax that Quebec mining companies pay from 12 per cent to 16 per cent of profits. According to the Mining Association of Canada’s Facts and Figures 2012, this change moved Quebec from the least to the third-most burdensome jurisdiction in Canada in 2011. The fact that the government is returning so soon to the trough creates additional uncertainty, which many investors cite as a key bugbear.

The proposed tax increases come at a bad time. Miners have been under considerable pressure lately, with juniors in particular experiencing capital access challenges. That said, most forum participants were sanguine about how the government’s propositions will play out, noting that increased public education is key.

For example, while a certain percentage of the public clearly believes that government can levy taxes ad infinitum, officials at the industry forum pointed out that even when mining infrastructure has been set up and paid for, there is no guarantee that it will be optimized. Extending ore bodies requires consistent new investments; however, ever-changing rules make it hard to gauge how profitable they will be.

Another key challenge, highlighted at the industry forum, is explaining the existing taxation structure. Few realize that the 16 per cent tax that companies pay on mining profits comes on top of existing federal and provincial taxes that all companies pay. Furthermore, this tax is calculated on a mine-by-mine basis. That means if a company is losing money in the initial development stages of one mine but making money on another, it cannot use the loss from the first to offset profits from the second. Therefore, mine operators can be losing money but still be forced to pay taxes.

The government is expected to decide on a royalty system this spring, when it releases its draft mining law.

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