Significant Changes to Foreign Affiliate Rules Announced
The foreign affiliate rules govern the tax treatment of amounts earned by foreign corporations in which Canadian taxpayers (including related persons) have a direct or indirect interest meeting a 10% ownership threshold (foreign affiliates or “FAs”). Very briefly, these rules govern (1) the extent to which passive income earned by a controlled foreign affiliate (“CFA”) is imputed to and taxed in the hands of Canadian direct or indirect shareholders, and (2) the taxation of distributions made to a Canadian resident by one of its FAs. These rules are discussed in much greater detail here.
In August 2011, the Department of Finance announced significant changes to the foreign affiliate rules, many of which will impact Canadian taxpayers in the mining industry. These changes are detailed and complex. Amongst the changes of most relevance to the mining industry are the following:
Hybrid Surplus: under existing rules, capital gains realized on shares of an FA that are “excluded property” are treated as 50% exempt surplus and 50% taxable surplus. The new proposals will treat the entirety of such gains as “hybrid surplus”, a new category of surplus. This rule will prevent taxpayers from repatriating only the exempt surplus portion of the gain free of Canadian tax, with the unsheltered taxable surplus portion left offshore. Instead, the entire gain will be lumped together, with recognition given for underlying foreign tax (if any) imposed on the sale, with the result that the rate of Canadian tax payable on repatriation of hybrid surplus depends on whether the foreign tax exceeds the notional rate of Canadian corporate tax on capital gains (currently 13.25%). This change applies after August 19, 2011 in respect of gains on dispositions to non-arm’s-length parties, and after 2012 for dispositions to arm’s-length parties.
Distributions: pro rata distributions by FAs (other than on liquidations, wind-ups and share repurchases) will henceforth be treated as dividends, irrespective of the corporate law form (i.e., as a dividend or return of capital). A related rule will allow the taxpayer to elect to treat the distribution as a reduction in the cost of the FA’s shares (i.e., pre-acquisition surplus) rather than as a distribution of earnings. These rules apply effective August 20, 2011.
Upstream Loans from FAs: for many years Canadian taxpayers have caused their FAs to loan surplus cash to them rather than distribute such cash as a dividend, if some or all of the dividend might be treated as coming from the FA’s taxable surplus so as to be taxable in the Canadian shareholder’s hands. A new rule will generally treat such loans from an FA to a Canadian direct or indirect shareholder (or certain persons related thereto) as ordinary income, unless repaid within two years (other than as part of a series of loans and repayments). Relief is available to the extent that the FA had available exempt surplus or foreign tax-sheltered taxable surplus sufficient to have made a dividend fully deductible in Canada, had a dividend been paid. At the 2011 Canadian Tax Foundation Annual Conference on November 29, 2011, the Department of Finance indicated that it was open to providing similar relief for previously-taxed FAPI, but that no relief is likely to be provided for pre-acquisition surplus. These rules apply after August 19, 2011, and loans in existence as of that date will be treated as having been made on that date (i.e., the two-year clock will start then).
Reorganizations of FAs: new rules are being proposed dealing with (1) liquidations of an FA which has one or more Canadian shareholders, (2) liquidations of an FA in which another FA of the Canadian taxpayer is a shareholder, and (3) mergers involving an FA of the Canada taxpayer, describing the conditions under which rollover treatment will be provided.
These rules further increase the complexity of the FA system, and Canadian mining companies with foreign subsidiaries will need to review them carefully. See here for the full text of these proposals.
Peruvian Government Introduces Mining Legislation
The new Peruvian government presented legislation overhauling the mining tax regime on September 14, 2011. Instead of the existing tax which is based on sales, the new regime will be based on miners’ operating profits, which should lead to a fairer result, said Finance Minister Miguel Castilla. Mining tax revenues (an important source of funds for Peru, a major world producer of copper, silver, gold and zinc ) are expected to increase $1.1 billion annually and help pay for a package of economic stimulus measures. Mining companies without a tax stability agreement would be subject to an additional special tax of 2% – 8.4% of operating profits. Castilla said that at the highest rates, companies would pay no more than 50 percent of their operating profits.
For more see here.
Australian Government Releases Second MRRT Exposure Draft
On September 18, 2011, the Australian government released the second exposure draft legislation for the Mineral Resource Rent Tax (MRRT) applicable to coal and iron ore projects beginning July 1, 2012. Following the adoption of all 94 recommendations made by the Policy Transition Group in March, an initial draft bill was released by the government in June for public consultation. The second exposure draft reflects comments received on the initial draft, and is itself open to further public comment up until October 5, 2011. For more see here.
Federal Court of Appeal Reverses Tax Court Decision in Daishowa
On September 23, 2011, the Federal Court of Appeal ruled on the taxpayer’s appeal and the Crown’s cross-appeal of the Tax Court decision in Daishowa-Marubeni International Ltd. v. the Queen, (2010 TCC 317), dealing with the calculation of the taxpayer’s proceeds of disposition of two sawmill operations that included forest tenures (for previous coverage see here. The taxpayer argued that no amount relating to the purchaser’s assumption of silviculture liabilities should be included in its proceeds of disposition, while the Crown conversely argued that the amount so included by the Tax Court (the current portion of the estimated silviculture liability for accounting purposes plus 20% of the long-term portion that liability) was too low and did not reflect the quantification of such liabilities agreed upon by the parties themselves.
In a majority (2-1) decision, the Court concluded that the Tax Court judge erred in deciding that the parties had not in fact agreed upon the value of the silviculture liability: they had, and it was that agreed-upon number that was to be included in the taxpayer’s proceeds of disposition. The “value” of that liability was irrelevant: having been quantified by the parties, there was no further debate as to what number should be used, and whether the liability was contingent or not was neither here nor there. Stated the Court, ” . . . while [the buyer's] future reforestation costs are likely uncertain or contingent, there is nothing uncertain or contingent about the consideration paid for the assumption of that liability.” See here for a copy of the decision. See here for our commentary on this case.
Australian Government Releases MRRT Draft Legislation
On June 10, 2011, Australia’s Treasury Department released an exposure draft of legislation enacting the new Mineral Resource Rent Tax applicable to coal and iron ore projects from July 1, 2012. Interested parties are invited to make submissions on the draft legislation by July 14, 2011. The Treasury release indicates that final legislation is intended to be introduced before the Australian Parliament towards the end of 2011. For a copy of the Treasury release, draft legislation and accompanying explanatory materials (including a Fact Sheet summarizing the operation of the MRRT), see here.
Australian Government Accepts All PTG Recommendations
The Australian government has announced that it is accepting all 98 recommendations made by the Policy Transition Group with respect to the revised resource taxation regime in Australia. Several months ago, the Policy Transition Group released two detailed reports entitled “New Resource Taxation Arrangements” and “Minerals and Petroleum Exploration” (see here), dealing with the proposed new Mineral Resource Rent Tax, the extension of the Petroleum Resource Rent Tax and the taxation of exploration for natural resources. See here for the Australian government’s press release accepting the PTG’s recommendations, including the crediting of current and future royalties.
Ontario Court Affirms Mining Act Tax
A recent decision of the Ontario Court of Appeal confirms that mining rights held separate from surface rights, regardless of how they were acquired or created, are subject to tax under the Mining Act (Ontario) (see here for the statute). This statute imposes an annual tax of $4/hectare on certain lands used for mining purposes and “mining rights”. In Algoma-Talisman Minerals Limited v. Ontario, 2010 ONCA 789 (see here), the Court dealt with a situation in which a predecessor to the taxpayer conveyed lands to the Province of Ontario subject to a reservation to the mineral rights relating to such lands, including surface rights necessary to explore and exploit ore bodies. An argument by the taxpayer that tax was not exigible because it had “mineral rights” rather than “mining rights” was dismissed by the Court, which concluded that the term “mining rights” included mineral rights and that tax applied because those mining rights had been severed from the surface rights held by the Crown, as stipulated by s. 189(1)(e) of the statute. See here for the lower court judgment describing the facts in more detail.
2011 Manitoba Budget Extends 30% METC
In its 2011 budget released on April 13, 2011, the Manitoba government extended its generous 30% mineral exploration tax credit (“METC”) for mineral exploration. The METC is a 30% non-refundable personal income tax credit for Manitoba residents who invest in eligible flow-through shares of qualifying mineral exploration companies. While the current METC rules are limited to flow-through share agreements entered into by March 2012, the 2011 budget announced that the METC will be extended to cover flow-through share agreements entered into before April 1, 2015. See here for more information.
Refund Interest Included in Computing Resource Allowance, Court Rules
On March 24, 2011, the Federal Court of Appeal released its decision dismissing the Crown’s appeal in The Queen v. 3850625 Canada Inc., 2011 FCA 117. In this case the taxpayer (formerly Fording Coal Limited) had been assessed (and had paid) tax on income from its business of producing coal. The amount of this tax and about $6.5M of refund interest were repaid to the taxpayer upon a successful appeal in 1997, such interest being included in its taxable income for that year. However, the Crown took the position that the interest income should not be included in computing the taxpayer’s “resource allowance” for the year, a concept that was phased out by 2007 when Crown royalties became deductible. The Tax Court of Canada agreed with the taxpayer, concluding that the refund interest was includable in its “gross resource profits” because it arose from managing tax obligations arising directly from producing and processing coal. In rejecting the Crown’s appeal, the Federal Court of Canada concluded that the lower court had applied the correct legal test, and that there no overriding error in the Tax Court’s decision in favour of the taxpayer. See here for the FCA decision.
2011 Ontario Budget Extends Currency Reporting Election to Mining Tax
Ontario mine operators are generally subject to a tax on mining profits under the Mining Tax Act (Ontario), based on amounts computed in $Cdn.. For income tax purposes, the general rule under the Income Tax Act (Canada) is that all amounts must be computed in $Cdn., but most corporations that use one of certain permitted foreign currencies as their primary currency in their records and books of account for financial reporting purposes (their “functional currency”) may elect to compute their income tax results using that functional currency.
The 2011 Ontario Budget released on March 29, 2011 proposes to make amendments to the Mining Tax Act to allow mine operators who (for income tax purposes) are reporting in such a functional currency to elect to file their Ontario mining tax returns in the same functional currency. This election would apply until such time as the mine operator revokes its functional currency election under the Income Tax Act (Canada) or ceases to meet the conditions for functional currency reporting under either the Income Tax Act (Canada) or the Mining Tax Act.
As a result of these amendments, mine operators who follow functional currency reporting for corporate income tax purposes would no longer have to prepare a separate set of Canadian-dollar financial statements solely for the purposes of filing the Ontario mining tax return. The amendments would be based on the functional currency rules in the Income Tax Act (Canada) and would apply for taxation years beginning after December 31, 2010.
See here for the Ontario Budget documents.
2011 Federal Budget Mining Tax Developments
The 2011 federal budget announced on March 22, 2011 contained certain tax changes relevant to mining in Canada. While the budget will not pass the House of Commons in its current form due to the intervening federal election being held on May 2, it is likely that most or all of these measures will be introduced by any new government, as none of them appear to be politically controversial. The mining-specific measures are (1) a proposal to prevent the charitable tax credit arising from charitable donations of flow-through shares from being used to eliminate the inherent accrued capital gain in such shares, (2) the extension of the mineral exploration tax credit for flow-through shares for another year, and (3) changes in the tax treatment of costs relating to oil sands development, including oil sands mining. See here for more details.
Fraser Institute Releases 2010/2011 Survey of Mining Companies
The Fraser Institute (a well-known public policy think-tank) has released the results of its annual survey of metal mining and exploration companies, canvassing their views on the way in which various factors (including taxation rules) affect the attractiveness of 79 different jurisdictions around the world. The results of the survey represent the views of executives and exploration managers in mining and mining consulting companies operating around the world. Alberta was ranked first overall, with Quebec and Manitoba also ranked in the Top 10 jurisdictions for mining exploration investment. Quebec’s decline from first place to third place was attributed in part to tax increases announced in the spring of 2010. See here for the study.
Australian PTG Issues Mining Tax Reports
In late December 2010, the Policy Transition Group (“PTG”) established by the Australian government in August 2010 issued two reports: “New Resource Taxation Arrangements” and “Minerals and Petroleum Exploration.” Copies of the reports are available here.
The first report contains 94 recommendations on the design and implementation of the policy principles announced by the Government on 2 July 2010 relating to the introduction of the Minerals Resource Rent Tax (“MRRT”) and the transition arrangements for the Petroleum Resources Rent Tax (“PRRT”). The broad design features of the MRRT were derived from the Heads of Agreement signed by the Government and representatives of BHP Billiton, Rio Tinto and Xstrata on 1 July 2010.
Amongst the most important tax recommendations are:
- moving the taxing point upstream to the run of mine stockpile;
- deferring recognition of a starting base for non-producing tenements;
- increasing market value starting base losses by the consumer price index;
- limiting deductions to those amounts necessarily incurred in extracting the resource and bringing it to the taxing point; and
- proposing rules governing the use and transferability of losses.
Full crediting of state and territorial mining royalties is recommended, subject to the imposition of measures to ensure that these local governments do not have incentives to increase royalties on coal and iron ore.
The second report (the “MPE Report”) deals exclusively with exploration. The PTG stated that “Australia’s capital markets provide an efficient and effective mechanism for allocating funds to sectors across the Australian economy”. Given this fact, the prevailing high rate of commodity prices and the treatment of expenses of exploring for coal and iron ore in the new MRRT, the PTG concluded that it “does not believe that a convincing case exists at present for a financial or tax based incentive scheme to promote exploration in Australia.” However, recommendations towards reducing the regulatory burden on resource explorers were made.
Chilean Copper Royalty Increase Largely In Place
Reuters reports that the copper mining industry has largely agreed to the voluntary royalty regime demanded by the Chilean government. The new regime is being enacted by the world’s leading source of copper partly to fund earthquake reconstruction programs. The companies identified as having agreed to the new royalty scheme include BHP Billiton, Xstrata plc, Antofagasta PLC, Freeport-McMoRan Copper & Gold Inc. and Anglo American PLC. In contrast to the current royalty of between 4 and 5 percent on operating profits, the revised royalty regime (which is based on copper prices and producer margins) sets the sliding scale royalty from 4% to 9%, rising in 2018 to 5% – 14%. Mining Minister Laurence Golborne stated that the government hopes to raise up to an additional $1B during the period 2011-2013 from this measure. See here for more.
Natural Resources Canada Issues 2010 Tax Update
The Economic and Financial sub-committee of the Intergovernmental Working Group on the Mineral Industry (IGWG) released its 2010 Update in November 2010. The 2010 Report (available here reflects the Canadian government’s analysis of Canadian mining tax issues. The IGWG set out its views on a number of taxation issues, and in particular responded to various suggestions made by Prospectors and Developers Association of Canada (PDAC), most recently in its August 2010 paper entitled Submission to the House Standing Committee on Finance (available here).
Specifically, PDAC had recommended making the existing 15% mineral exploration tax credit (METC) (which is typically extended for one more year in each federal budget) a permanent feature of the Income Tax Act (Canada), as well as temporarily expanding it to a 30% rate for a 2-year period, citing the importance of this tax incentive to the funding of continued exploration work in Canada. The IGWG declined to recommend either proposal, choosing instead merely to continue its analysis of the METC. PDAC also suggested allowing a greater range of expenses to constitute Canadian exploration expenses (CEE), which excludes expenditures on a producing mining property. Specifically, PDAC recommended treating any mine which had not been operative in 5 years or more as being a “new mine” for CEE purposes, such that exploration activity at the site would be treated as CEE. Also suggested was the expansion of CEE to include various financing and overhead expenses, so as to make these amounts eligible for renunciation to investors via flow-through shares (and potentially investment tax credits, for individual FTS holders). Again, the IGWG declined to pursue this initiative, meaning such expenses incurred by mining exploration companies (which often are not in a tax-paying position) are likely to go undeducted for many years, until taxable income is generated. The IGWG did however undertake to study whether CEE should be expanded to include the costs of some types of environmental studies that are currently not CEE. It also recommended tabling the results of NR Canada’s international tax study at the 2011 Energy & Mines Ministers’ Conference.
OECD Recommends Expanded Australian Resource Tax
In a recent economic survey of Australia, the Organization for Economic Co-operation and Development (OECD) has recommended a broadening of the new proposed federal mining tax (see here for prior coverage). The proposed new tax is essentially limited to coal and iron ore mining. However, the OECD has suggested that the proposed new tax should not be limited to larger companies or restricted to only coal and iron ore, as this may distort investment incentives and decisions. States the report, “Replacing the royalties by a well designed resource rent tax extended to all commodities and all companies irrespective of their size would be desirable.” The elimination of state-level resource royalties is also recommended (although this is politically unlikely).
For a copy of the OECD report see here.
Zambia Lifts Copper Mining Tax
Media sources report that the government of Zambia has completed negotiations with the copper mining industry to permanently scrap the 25% windfall profit tax (introduced in 2008 and suspended in 2009) and eliminate the 15% export levy on copper concentrate imposed on some firms. The 15% variable profit tax (exigible once copper prices reach a certain threshold) remains in place, as do 3% royalties and a 30% corporation tax payable by copper miners in the country. Canadian-listed mining companies First Quantum Minerals Ltd. and Equinox Minerals Ltd. are among the most prominent copper miners in Zambia. For more see here.
Goldcorp Completes Sale of Terrane Interest
Senior Canadian miner Goldcorp Inc. announced on October 20, 2010, that it had completed the sale of its investment in Terrane Metals Corp. to Thompson Creek Metals Inc. Under the terms of the transaction, Goldcorp receives an aggregate of 13.9 million common shares of Thompson Creek representing approximately 8% of Thompson Creek’s issued and outstanding shares and C$240.5 million in cash. Oslers acted for Goldcorp on this transaction. Goldcorp’s official press release can be found here.
Australian Mining Tax Deal in Jeopardy
The Australian newspaper is reporting that mining giants Rio Tinto, Xstrata, and BHP Billiton are considering abandoning the deal reached earlier this year with the Australian government over the new federal mining tax (see here for prior coverage). At issue is who will bear the exposure to future increases in state mining royalties. Under the earlier deal the government had agreed to allow a credit in the new federal resource tax for any mining tax royalties imposed at the state level, but the government has recently stated that this pledge was limited to all existing such charges and any scheduled increases. The major miners are concerned that any future increases will not be creditable under the new federal mining tax, as states may have an incentive to increase their royalties going forward. Prime Minister Julia Gillard was quoted as saying “We obviously won’t be giving a green light to state and territory governments to increase their royalties in a way which means the federal government effectively foots the bill.” The issue is to be studied further by a Policy Transition Group. The original story can be found here.
Chile Moves to Increase Mining Royalties
The lower house of the Chilean Congress has passed a bill to increase the royalties payable by mining companies operating within Chile. The amount of the increase could move the royalty rate as high as 9% from the current rates of 4% and 5%, depending on the price of commodities, and is stated to be effective 2018. Many Canadian mining companies, such as Teck Resources, Barrick Gold, Kinross Gold and Goldcorp having significant assets within Chile, which is the world’s leading copper producer. For more information see here.
B.C. Court of Appeal Rules Slag is a “Mineral“
In February 2009, the Supreme Court of British Columbia heard an appeal by Pacific Abrasives & Supply, Inc. under the Mineral Tax Act, R.S.B.C. 1996, c. 291 (“MTA”). The issue was whether slag constitutes a “mineral” under the MTA, such that the taxpayer was an “operator” of a “mine” for MTA purposes when it processed and sold abrasive particulate and roofing granules derived from slag produced from a copper smelting facility. In that earlier decision, the B.C. Supreme Court concluded that a careful reading of the term “mineral” limited its scope to natural substances and therefore excluded slag.
The province appealed to the B.C. Court of Appeal, which on August 6, 2010 reversed the lower court and concluded that slag was indeed a “mineral” for MTA purposes. In a very technical judgment that concentrates on applying principles of legal interpretation to the defined term “mineral” in the MTA, the Court of Appeal held that “minerals” are not limited to natural substances but are specifically deemed to include “other materials from . . . previously mined deposits of minerals.” As such, the taxpayer’s profits from its slag-related operations were determined to be subject to tax under the MTA.
The Court of Appeal judgment in Pacific Abrasives & Supply, Inc. and The Queen and Minister of Revenue (B.C.), 2010 BCCA 369, can be found here.
CEE Claim Based on Oral Agreement Denied
On August 9, 2010, the Tax Court of Canada released its decision in Bennett v. The Queen (2010 TCC 413), denying the taxpayer’s claim to $20,000 in Canadian exploration expense deductions. Mr. Bennett’s CEE claim was based on an oral agreement with the principal behind two companies that claimed to have carried out exploration work in the Cariboo region of British Columbia. The Tax Court concluded that this oral agreement and invoices between the parties were insufficient to establish that the taxpayer had an interest in the relevant properties and that he had actually paid the amounts claimed. As such, this case highlights the importance of documenting the business agreement between the parties and keeping adequate records of the flow of funds (e.g., cancelled cheques, bank statements, etc.). The Tax Court’s decision can be found here.
Quebec 2010 Budget Increases Mining Taxes
The budget released by the government of Quebec earlier this year significantly increases taxes on mining within the province. In the budget materials, the Quebec government states that the “overall financial yield” of the mining tax regime has been unsatisfactory, and that accordingly a number of changes will be made to the system (generally effective as of the date of the budget) “to enable the government to collect fair compensation for the use of a non-renewable resource that belongs to the public domain”. As yet these changes have not yet been enacted into law, but are expected to come before the Quebec Assembly in the fall of 2010. See here for more details of these changes.
Osler Client Kinross Gold to Combine with Red Back Mining in U.S. $7.1B Friendly Merger
On August 2, 2010, Kinross Gold Corporation announced that it has agreed with Red Back Mining Inc. to effect a friendly merger whereby Kinross acquires all of the outstanding common shares of Red Back, with Red Back shareholders receiving 1.778 Kinross common shares and 0.110 of a Kinross common share purchase warrant for each Red Back common share. Kinross is represented by Osler, Hoskin & Harcourt LLP For more information see: http://www.kinrossir.com/pdf/100802.pdf
CRA Opines Ontario Notional Resource Allowance Cannot Be Less than Zero
In a recently released technical interpretation, the CRA expressed the opinion that a taxpayer’s notional resource allowance under s. 36(3) of the Taxation Act, 2007 (Ontario) for purposes of the additional tax on Crown royalties cannot be less than zero. For more information see here.
Australia Scales Back Mining Supertax
On July 2, 2010, the Australian government announced significant changes to its proposed Resource Super Profits TAX (“RSPT”), which had originally been proposed in May 2010 as a 40% tax on “super profits” from the exploitation of non-renewable resources.
Under the new proposal, a “minerals resource rent tax” (“MRRT”) will replace the RSPT, and will effectively limit the scope of the new resource tax to coal and iron ore (the government estimates that 85% of mining companies that would have been subject to the RSPT will be excluded from the MRRT). The new MRRT will apply effective July 1, 2012 to both new and future projects. Miners with annual resource profits of under A$50M/year would be exempted.
The headline rate of the new MRRT is 30% based on the commodity extracted (the mine’s gate value less costs incurred to that point), with a 25% extraction allowance intended to limit the tax to the value of the extracted resource (i.e., excluding the value of the miner’s expertise). This would appear to result in an effective rate of tax of 22.5%. Miners can choose to use market value (as of 1 May 2010) or book value (excluding mining rights) as the starting base for depreciation purposes going forward. State and territorial royalties paid can be used to offset MRRT liability.
For more information see the Prime Minister’s press release (http://www.pm.gov.au/node/6868) and MRRT fact sheet: (http://www.pm.gov.au/node/6868).
Tax Court Renders Decision of Contingent Liabilities
Mining operations typically involve significant reclamation liabilities, the tax treatment of which has been an area of debate and uncertainty. A Tax Court of Canada decision dated June 11, 2010 provides some instructive guidance on the treatment of contingent liabilities.
In Daishowa-Marubeni International Ltd. v. the Queen, (2010 TCC 317) [link to case: http://decision.tcc-cci.gc.ca/en/2010/2010tcc317/2010tcc317.html], the Court dealt with an agreement of purchase and sale for two timber mill divisions of the taxpayer in Alberta. In each case, part of the agreement provided for the purchaser to assume the reforestation or silviculture liabilities of the taxpayer. No dollar amount was assigned to this assumption of liabilities in the agreement of purchase and sale. The CRA treated this assumption of liability by the purchaser as additional proceeds of disposition for the taxpayer, and increased the taxpayer’s sale proceeds by $11,000,000 in one case and $2,996,380 in the other.
Noting that the taxpayer admitted that the purchaser’s assumption of these contingent liabilities was of benefit, the Court concluded that the purchaser’s assumption of reforestation liabilities was part of the consideration to the taxpayer from the sale. However, the amount to be added to the taxpayer’s proceeds of disposition was determined to be much less than the amounts assessed by the CRA.
Liabilities such as reforestation or reclamation are very difficult to quantify, and there is by nature a very high degree of uncertainty as to the obligations: they are an obligation to do something or achieve a particular result, but not spend a defined amount of money in so doing. The taxpayer argued that the degree of uncertainty as to these obligations was so high as to be calculable, and that therefore no amount should be included in its sale proceeds. The Court rejected this argument, instead requiring that one must consider “the circumstances surrounding the uncertainty, the nature of the amount itself and the element of the tax regime to which it is to be subjected.”
However, the CRA’s quantification of the liability was determined to be far too high. The estimate that the CRA had used for assessing purposes was not discounted to reflect net present value, had been prepared for a somewhat different purpose, and was subject to quite a bit of uncertainty. Moreover, reforestation liabilities yield no deduction for the obligor until actually paid, yet on assumption require the value to be included in the vendor’s income. The Court’s judgment was that on balance, it was fair in the circumstances to reduce the value of the assumed liability substantially, such that the amount added to the taxpayer’s proceeds of disposition was the current portion of the silviculture liability plus 20% of the estimated future liability (i.e., an 80% discount for the long-term portion). Miners considering the tax treatment of reclamation obligations outside of the rules governing environmental trusts will wish to examine this decision closely.