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A Guide to Canadian Mining Taxation

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A Guide to Canadian Mining Taxation A guide to Canadian mining taxation Third Edition February 2016 kpmg.ca/mining Preface This is the third edition of A Guide to Canadian Mining Taxation, As this edition of A Guide to Canadian Mining Taxation goes which we publish bi-annually.* For the past three to four years, to press, two issues are capturing global attention. The first the mining industry has been wrestling with a combination of is base erosion and profit shifting (BEPS), a tax-specific issues it has not experienced before. Economic stagnation in ethical issue. Governments are formally expressing concern emerging markets has softened commodity prices, stemming about erosion of their tax bases by multinational corporations mining revenues and disenchanting investors. How much that can exploit inter-relationships and treaties among capital will eventually flow back to mining equities is in doubt, global jurisdictions. News media have reported the story as given the success of commodities ETFs. At the same time, corporations unwilling to pay their fair share of taxes. The mining companies have been struggling to control operating Organization for Economic Co-operation and Development and capital costs that threaten their margins. In these (OECD) has made recommendations to empower circumstances, many mining companies have been more governments, and some changes are beginning to appear. concerned about protecting the business than growing the We expand on BEPS in a section beginning on page 97. business. The other potentially larger issue is the new Canadian and To protect their businesses, mining companies have needed global resolve to halt climate change. Canada’s new federal to rely on risk management and carefully crafted financial government is enthusiastic about this movement, and strategies that preserve value. Taxation is an important piece several provinces are in alignment. Alberta, most notably, of this puzzle, and we are proud to contribute our updated guide has announced a new climate change agenda that will have to a field that is becoming more complex with each passing consequences for the Province’s coal industry as well as year. Global mining operates across a plethora of national, the oil sands. Moreover, the US has now formally rejected regional and local jurisdictions, most of which engage the the Keystone XL pipeline. We await further developments mining industry with their own policies, regulations and taxes. in this area and expect some global impacts on all extractive industries. When mining is in a rising commodity price cycle, as it was in the first decade of this century, governments tend to We hope this book will be a helpful summary of the main raise mining taxes to capture a higher share of profits. When features of our current mining tax regime. Readers who require mining reverts to a falling commodity price cycle, as it is doing further information or assistance are invited to contact any of now, governments take time to adjust to the new reality. KPMG’s mining professionals listed on the following page. Although the industry is now showing signs of stabilizing, *We would like to express our sincere appreciation for the external business conditions such as the global economy and significant contributions made by Brian Carr in the creation commodity prices do not herald a return to growth in the short of the first two editions of this book. Without Brian’s tireless term. Looking farther out, however, we continue to see a very efforts and passion, we would not be in a position to release bright future for the mining industry in Canada. Much potential this third edition. economic growth remains in emerging markets (the world’s major mining markets) and many companies have taken Statements of law in this book are current to December 31, 2015. impressive steps toward stabilizing their financial issues. Scott Jeffery Partner & General Editor © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG’s Mining Tax Contacts If you require more information on the matters discussed in this publication, please call your local mining tax advisor. We welcome the opportunity to meet with you to discuss how we can best assist you. Toronto Lee Hodgkinson 416-777-3414 [email protected] 333 Bay Street National Industry Leader, Mining Bay Adelaide Centre, Suite 4600 Toronto, Ontario Tom King, Canadian Corporate Tax 416-777-8827 [email protected] M5H 2S5 Iain MacIntosh, Indirect Tax 416-777-3121 [email protected] Ron Maiorano, US Corporate Tax 416-777-8278 [email protected] Lisa Somers, Canadian Corporate Tax 416-777-8543 [email protected] Lawrence Teltscher, Canadian Corporate Tax 416-777-8687 [email protected] Penny Woolford, International Corporate Tax 416-777-8906 [email protected] Vancouver Philippa Wilshaw, 604-691-3039 [email protected] 777 Dunsmuir Street, Suite 900 GVA Mining Industry Leader Vancouver, British Columbia V7Y 1K3 Jason Cooledge, Canadian Corporate Tax 604-691-3209 [email protected] Karl Dennis, US Corporate Tax 604-691-3045 [email protected] Scott Jeffery, Canadian Corporate Tax 604-646-6340 [email protected] Jodi Kelleher, International Corporate Tax 604-646-6305 [email protected] Tony Martin, International Corporate Tax 604-691-3503 [email protected] Mark Worrall, Indirect Tax 604-691-3106 [email protected] Angelos Xilinas, Indirect Tax 604-691-3479 [email protected] Calgary James Rowling, US Corporate Tax 403-691-7947 [email protected] Bow Valley Square II Bruce Weatherdon, Canadian Corporate Tax 403-691-7965 [email protected] 205–5th Avenue SW, Suite 2700 Calgary, Alberta T2P 4B9 Saskatoon Thomas Zurowski, Canadian Corporate Tax 306-934-6207 [email protected] River Centre 500, 475 – 2nd Avenue South Saskatoon, SK S7K 1P4 Montréal Hugues Lachance, Canadian Corporate Tax 514-840-2542 [email protected] 600 Boulevard de Maisonneuve Ouest, Bureau 1500 Montréal, Québec H3A 0A3 Halifax Steven Moore, Canadian Corporate Tax 902-492-6069 [email protected] Purdy’s Wharf Tower One 1959 Upper Water Street, Suite 1500, Halifax, Nova Scotia B3J 3N2 © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Table of contents 2 Introduction 3 Canada’s Mining Industry 3 The Tax Environment 5 About This Book 6 Overview of the Canadian Tax Regime 7 Mining Activities 7 Forms of Organization 7 Income Taxation 9 Capital Gains 9 Utilization of Losses 01 Tax Administration 01 Filing Requirements and Tax Payments 10 Corporations 0 1 Individuals 1 1 Trusts 1 1 Partnerships 1 1 Federal Requirements 2 1 Québec Requirements 3 1 Joint Ventures 31 Functional Currency Tax Reporting 14 Deductions, Allowances, and Credits 51 Canadian Exploration Expenses 61 Canadian Development Expenses 71 Canadian Oil and Gas Property Expenses 71 Foreign Resource Expenses 71 Successor Corporation Rules 8 1 Original Owner 8 1 Successor 9 1 Predecessor Owner 20 Amalgamations 21 Wind-Ups 21 Acquisition of Control © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Table of contents 22 Capital Cost Allowance 22 Calculation of Capital Cost Allowance 24 Capital Cost Allowance for Industrial Mineral Mines 24 Flow-Through Shares 25 The Look-Back Rule 25 Stacking Arrangements 26 Use of a Limited Partnership 26 Dispositions of Flow-Through Shares 26 Advantages and Limitations of Flow-Through Shares 27 Investment Tax Credits 27 Pre-Production Mining Expenditures 27 Flow-Through Mining Expenditures 28 Atlantic Tax Credit 28 Scientific Research and Experimental Development Credit 29 Qualifying Environmental Trusts 30 Provincial Flow-Through Mining Tax Credits and Deductions 30 British Columbia 30 Saskatchewan 30 Manitoba 30 Ontario 30 Québec 30 Other Provincial Credits and Adjustments 30 British Columbia Mining Exploration Tax Credit 30 Québec Resource Tax Credit 31 Québec Investment Tax Credit 31 Ontario Resource Allowance Adjustment 32 Structuring Mining Investments 33 Corporate Reorganizations 33 Tax-Deferred Transfers 34 Amalgamations 34 Wind-Ups of Subsidiaries © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 35 Acquisition of Control 37 Partnerships and Joint Ventures 37 Income Tax Consequences 39 Advantages of Partnerships 40 Farm-Ins/Farm-Outs 41 Foreign Operations 41 Operation Through a Branch 42 Operation Through a Foreign Corporation 43 Foreign Affiliates 43 The Foreign Affiliate Regime 43 The Surplus Rules 46 The Foreign Accrual Property Income (FAPI) Rules 49 Transfer Pricing 49 Canadian Transfer Pricing Rules and Guidance 49 Transfer Pricing Penalties and Contemporaneous Documentation Requirements 49 OECD BEPS Project and the Impact on Transfer Pricing Rules 50 Non-Resident Investors 50 Acquiring Assets Versus Acquiring Shares 51 Operating in Canada Through a Branch 52 Operating in Canada Through a Subsidiary 56 Provincial Mining Tax 57 British Columbia 57 Net Current Proceeds Tax 57 Net Revenue Tax 58 New Mine Allowance 58 Investment Allowance 58 Alberta 58
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