Canadian Thin Capitalization Developments for Foreign Currency Debt
The Canada Revenue Agency recently made an announcement that will help many Canadian subsidiaries of multinational groups that borrow from non-Canadian group members in foreign currencies. The announcement indicates that the CRA applies Canada’s thin capitalization rules (which limit the deductibility of interest) so as to ignore foreign exchange FX) fluctuations on the debt principal after the debt is incurred. This confirmation will considerably assist many Canadian debtors, given that the recent depreciation of the Canadian dollar (particularly against the U.S. dollar) may otherwise have caused them to exceed the permitted thin capitalization limits. See here for more
Canadian Year-End Tax Planning Deadlines for 2015
The end of the calendar year brings various recurring tax planning deadlines under the Income Tax Act (Canada). This article reviews some of the most important deadlines in a cross-border tax context, using as a model a Canadian resident corporation with a December 31 tax year-end.
Canada Revenue Agency Declares Open Season on Taxpayer Information
The Canada Revenue Agency’s provocative (and successful) effort to obtain the taxpayer’s tax accrual working papers in Minister of National Revenue v. BP Canada Energy Co. indicates that the CRA now considers those materials to be fair game for use as an audit roadmap for tax purposes. Unless overturned, the decision will leave a taxpayer’s subjective assessment of its uncertain tax positions (and any other tax analysis) completely exposed to demands for disclosure from Canadian tax authorities, unless protected by lawyer-client privilege. Those preparing that kind of confidential and sensitive tax analysis would be well advised to do so within the scope of lawyer/client privilege, which is not lost under Canadian law when disclosure is made to the taxpayer’s external auditors for the limited purpose of completing its financial statements. Steve’s article can be read here
Canada Revenue Agency Forces Taxpayer to Disclose Discussions With Accountant
A recent Tax Court of Canada case illustrates the ease with which the Canada Revenue Agency can obtain the details of communications and discussions between taxpayers and non-lawyers such as accountants. Lawyer-client privilege remains the only reliable way in which to obtain advice on tax-related matters that is protected from disclosure to tax authorities, as discussed in a recent Tax Notes International article: see here
2015 Ontario Budget Eliminates Ontario Resource Tax Credit and the Additional Tax on Crown Royalties
The resource allowance in the Corporate Income Tax system, calculated as 25 per cent of adjusted resource profits, acts as a proxy for actual royalties and mining taxes paid to a province. It was introduced by the federal government in 1976, primarily to put a ceiling on deductions of then-increasing provincial royalties and mining taxes. The original policy rationale is no longer relevant as increased competition for exploration and development capital has pressured provinces to levy royalties and mining taxes at lower rates. The federal resource allowance was fully eliminated in 2007 and replaced with a deduction for actual royalties and mining taxes paid. Ontario is now the only province that provides a resource allowance in lieu of a deduction for royalties and mining taxes. This is done through the Ontario Resource Tax Credit and the Additional Tax on Crown Royalties, which apply for taxation years ending after 2008. The Province is proposing to harmonize with the federal government and other provinces by eliminating the Ontario Resource Tax Credit and the Additional Tax on Crown Royalties and providing a deduction for royalties and mining taxes paid, effective April 23, 2015. Elimination of the Ontario Resource Tax Credit and the Additional Tax on Crown Royalties would fulfil a recommendation by the Commission on the Reform of Ontario’s Public Services. Accrued but unused Ontario Resource Tax Credit amounts would be eligible for carry-forward to offset Ontario income tax payable in the first five taxation years beginning after April 23, 2015.
CRA Issues Draft Resource Sector ‘Principal Business Corporation’ Folio
The Canada Revenue Agency is updating many of its folios on different tax issues, which summarize the CRA’s interpretation of the law on those issues. On April 2, 2015, the CRA released a draft version of Income Tax Folio S3-F8-C1 Principal-business Corporations in the Resource Industries, which replaces and cancels former Interpretation Bulletin IT-400, Exploration and Development Expenses – Meaning of Principal-Business Corporation. PBC status is relevant in a number of specific mining-sector tax rules: for example, in order to be a “flow-through share” as defined in s. 66(15) ITA, the issuer of the share must be a PBC. The CRA is accepting comments on this document until July 3, 2015. See here for the draft folio, and here for a summary of substantive technical and interpretive changes.
Canada Makes Mining-Sector Tax Announcement at PDAC 2015
On March 1, 2015, Canada’s Department of Finance announced two mining-sector changes to the Income Tax Act (Canada), (“ITA”) described here
Canada Releases Revised Back-to-Back Loan Rules
On October 20, 2014, the Department of Finance released the final version of the “back-to-back loan” rules originally announced in the February 2014 federal budget. Where applicable, these rules (effective starting in 2015) have the effect of deeming debt that a Canadian borrower in fact owes to its creditor to instead be owed to a non-resident of Canada who does not deal at arm’s length with the Canadian debtor. This has the effect of either increasing the Canadian interest withholding tax applicable on interest payments and/or causing the debt to be subject to the interest deductibility restrictions of Canada’s “thin capitalization” rules. See here for Steve’s analysis of these rules.
Lawyer-client privilege is a critical element of prudent tax planning. See here for an overview of the rules governing how privilege protects confidential communications between lawyers and their clients, published in the most recent edition of Canadian Mining Magazine.
Revised International Tax Proposals
On August 29th, 2014, the Department of Finance issued draft legislation that included a number of international tax initiatives. Steve’s analysis of these proposals as published in Tax Notes International can be found here.
The BEPS Project
International tax issues are receiving quite a bit of news coverage these days, ranging from stories about multinational corporations arranging their affairs to pay less tax (relative to sales or revenues) in particular countries in which they operate to U.S. companies pursuing inversions to shed their U.S. tax residence and theirby reduce their U.S. taxes. Governments in search of tax revenues are increasingly concerned with the alleged explotation of gaps and mismatches in the tax rule of different countries. Steve’s regular tax column in Canadian Mining Magazine discusses international tax developments of relevance to the mining sector: see here for more details.
New “Back-to-Back Loan” Rules Adversely Affecting Canadian Debtors
Under proposals in the 2014 federal budget, Canadian entities that owe an amount to a creditor will be adversely affected if the creditor (or a creditor affiliate) has received an interest in property of a non-resident as security for that debt. Starting in 2015, the Canadian debtor will be treated as owing the debt directly to the non-resident that is securing the debt (not the creditor), resulting in interest on such debt potentially being subject to (1) non-resident interest withholding tax, and/or (2) restrictions on interest deductibility under Canada’s “thin capitalization” rules. For more on this development see here.
Canada to Unilaterally Override Tax Treaties With Proposed New Anti-Treaty-Shopping Rule
In the 2014 federal budget, the Department of Finance announced a sweeping new proposed rule that will significantly restrict when non-residents of Canada will be able to claim the benefit of a tax treaty between their home country and Canada to reduce Canadian tax payable. If enacted, this proposed rule effectively constitutes a dramatic and unilateral change by Canada to all of its over 90 tax treaties with other countries. Essentially, the proposed new rule denies a reduction in Canadian taxes that would otherwise occur under a Canadian tax treaty (a “treaty benefit”) where it is reasonable to conclude that one of the main purposes for a particular transaction was to obtain that treaty benefit. i.e., a “purpose” test. This development will be relevant to (1) non-residents earning Canadian-source income, (2) Canadians making payments to non-residents that are subject to Canadian withholding tax (e.g., dividends, royalties, participating interest and interest payable to a non-arm’s-length lender), and (3) eventually, Canadians earning foreign-source income from a country with which Canada has a tax treaty (since it would be logical for those countries to respond with similar rules limiting when they will grant treaty benefits to Canadians, directly or indirectly). For analysis of this development, please see here.
FTS Mineral Exploration Tax Credit Extended
Individuals investing in flow-through shares (FTS) issued by a mining company may be entitled to tax benefits beyond the renounced Canadian exploration expense/Canadian development expense available on all FTS. Where the FTS issuer incurs certain qualifying expenditures (essentially Canadian exploration expense incurred in mining exploration above or at ground level conducted in Canada) and renounces them to such a holder of FTS, that holder is entitled to an investment tax credit equal to 15% of the renounced qualifying expenditures (the “mineral exploration tax credit”). Currently the mining company must incur qualifying expenditures by the end of 2014 and renounce them to the investor under an agreement made before April 2014. The Budget extends the 15% mineral exploration tax credit for another year, by extending (1) the date for incurring qualifying expenditures to the end of 2015, and (2) the deadline for the company and the investor to enter into the FTS subscription agreement governing renunciation to March 31, 2015.
Taxation Policies Key to Mining in the Far North
Two studies released in 2013 on the Canadian mining industry show how critical mining is to the future of Canada’s Far North, and the important role of taxation policies in encouraging this industry’s valuable economic activity while ensuring that the region’s residents enjoy their fair share of the resulting benefits. In early 2013, the Canadian Chamber of Commerce released its comprehensive review of Canada’s mining industry, in a report entitled Mining Capital: How Canada Transformed its Resources Endowment Into a Global Competitive Advantage. Taxation policies will be key to developing mining in Canada’s Far North: see here for more:
Canadian Tax Developments in 2013
2013 brought significant Canadian tax developments in a number of areas. This article takes a brief look at the most significant Canadian tax developments in 2013 of interest to international businesses, tax practitioners and executives. 2013 in Review: Steve Suarez and Stephanie Wong review the major Canadian tax developments of 2013 in this article See here:
Supreme Court Dismisses Appeal in Amalgamation Case
The Supreme Court of Canada (SCC) on September 26 dismissed the taxpayer’s appeal in Envision Credit Union v. Canada (2013 SCC 48), a case in which two credit union corporations (the predecessors) merged to form a single entity (Envision) under the corporate laws of the province of British Columbia. Envision took the position that the merger was a taxable transaction that did not constitute a ‘‘qualifying amalgamation’’ (a tax-deferred merger of the two participating entities) under the Income Tax Act (Canada) and therefore, Envision could claim a higher amount of capital cost allowance (CCA), the Canadian tax version of depreciation. All seven SCC justices hearing the case disagreed and found in favor of the Crown. See here for a case comment
Canada Releases Foreign Affiliate Dumping Amendments
Canada’s Department of Finance on August 16 released proposed amendments to the foreign affiliate dumping (FAD) rules enacted in late 2012. As noted in a December 2012 article (prior coverage: Tax Notes Int’l, Dec. 17, 2012, p. 1145 ), the FAD rules are directed at perceived tax avoidance by foreign-controlled Canadian corporations that acquire or make investments in foreign subsidiaries. For more information see here:
Supreme Court of Canada Closes Book on Tax Dispute Over Assumed Liabilities
The Supreme Court of Canada (SCC) on May 23 wrote the final chapter in an important tax case that has been closely watched by the Canadian tax community when it released its decision in Daishowa-Marubeni International Ltd. v. The Queen (2013 SCC 29). For Steve’s commentary on the SCC’s decision see here. See here for the SCC’s decision.
The Essentials of the Taxation of Mining in Nunavut
On April 9, 2013, Steve Suarez presented at the Nunavut Mining Symposium on The Essentials of the Taxation of Mining in Nunavut on a panel that included Adam Chamberlain, the leader of BLG’s Team North. See here for a copy of Steve’s presentation.
Significant Mining Sector Tax Measures in 2013 Federal Budget
The Canadian federal government released its 2013 budget (the Budget) on March 21, 2013 (Budget Day). Included in the Budget were a number of tax measures of relevance to the mining community, in particular with reference to the tax treatment of expenditures made by mining companies. For more information see here:
Quebec Mining Royalty Forum to be Held March 15
The Quebec Ministers of Finance and Natural Resources have announced that a forum on mining taxes in Quebec will be held in Montreal on March 15, 2013. At this event, the mining industry and other affected groups will be provided the opportunity to comment on a consultation document on mining royalties in the province of Quebec to be released by the government on or before March 1st. The PQ government has previously announced its intention to increase Quebec mining taxes, and a new regime is expected to be announced later this year. For more information see here:
Mining to Drive Economic Development in Canada’s Far North
On January 28, 2013, the Conference Board of Canada released a report forecasting that mining activity in Canada’s Far North would double by 2020, and serve as the main driver of economic development in that region. Critical to this development will be addressing inadequate infrastructure, resolving regulatory uncertainty, enhancing the development of skills in short supply, and reaching appropriate understandings with aboriginal residents. See here for the Conference Board’s report “The Future of Mining in Canada’s North” http://www.conferenceboard.ca/ BLG’s Team North is comprised of a dedicated team of lawyers across many practice specialties who bring together their knowledge and expertise on matters relevant to Canada’s three territories and the upper regions of British Columbia, Alberta, Quebec and Labrador. Find out more here:
Canadian Chamber of Commerce Makes Mining Sector Tax Recommendations
The Canadian Chamber of Commerce released its report on Canada’s mining sector on January 30, 2013. Amongst the many recommendations made in this valuable analysis of the industry were a number of taxation-related items, including: – Introducing a targeted exploration tax credit to stimulate exploration in remote regions of Canada – Updating the Canada Revenue Agency’s published interpretative guidance on the scope of expenses included within Canadian exploration expenses, and reviewing the extent to which costs of aboriginal consultation and environmental regulatory compliance should be included as CEE; – Reducing the administrative burden of complying with multiple differing tax jurisdictions by exploring options for streamlining and harmonizing taxes across provinces and territories; – Reversing the action taken in the 2012 federal budget to exclude capital expenditures from the scope of expenditures eligible for the scientific research and developmental tax credit; – Allowing mining sector participants to recover the cost of their investment before subjecting them to tax on “profits”, by retaining the existing accelerated capital cost allowance (deduction of certain capital expenditures) on mining assets (including oil sands projects in Canada) and expanding it to include resource processing investments, including upgraders/other high conversion capacity investments and shared processing infrastructure, and other resource conversion equipment used in diamond, nickel, uranium and other mining operations; and – Making the mineral exploration tax credit permanent (currently it is renewed on a year-by-year basis). See here for a copy of the full text of this document. The Report also expressed concern with the effect of the new “foreign affiliate dumping” tax rules enacted by the government in 2012. These rules target certain forms of tax avoidance but extend beyond these situations to include legitimate business transactions, and have a particularly adverse effect on Canada’s junior mining sector, which includes many Canadian corporations with no material Canadian assets that act as public parent corporations of foreign subsidiaries carrying mining exploration and developments outside Canada. See here for a detailed analysis of these rules.
Detailed Analysis of Newly-Enacted “Foreign Affiliate Dumping” Rules
The new “foreign affiliate dumping” (FAD) rules announced in the March 2012 federal budget were formally enacted on December 14, 2012. These rules, which will have particular impact on Canada’s junior mining sector, will be relevant to (1) any Canadian corporation (Canco) that is (or becomes) controlled by a non-resident corporation and that owns or acquires shares of a foreign corporation, and (2) foreign purchasers of any Canco that owns shares of a foreign corporation. The FAD rules represent a major change in Canada’s international tax policy: in effect, they treat payments Canco makes “down” the corporate chain that relate to a foreign affiliate (even value-for-value payments) as if they were distributions made “up” the chain by Canco to its foreign parent (either a deemed dividend or a return of share capital). See here for a detailed analysis of the FAD rules, published in the December 17th edition of Tax Notes International (the world’s leading international tax journal), setting out the operation of the FAD rules, describing the consequences of their application and illustrating the various ways in which they can go beyond their stated objectives, with decision trees and examples to create a non-technical user’s guide.
Testimony Before Senate Finance Committee on Effect of FAD Rules on Mining Industry
On November 27, 2012, Steve Suarez, the Mining Association of Canada and The Prospectors & Developers Association of Canada appeared before Standing Senate Finance Committee to address the implications of the “foreign affiliate dumping” rules included in Bill C-45. These sweeping income tax changes will have a significant adverse effect on Canada’s mining industry, particularly the junior mining sector. See here for the transcript of this testimony.
BLG Represents Harry Winston Diamond Corporation in Ekati Diamond Mine Transaction
Toronto (November 14, 2012) — Harry Winston Diamond Corporation, a diamond mining and luxury goods retailer, has agreed to purchase from BHP Billiton Canada Inc. an 80 per cent interest in the Ekati Diamond Mine as well as the associated diamond sorting and sales facilities in Yellowknife, Northwest Territories and Antwerp, Belgium. Borden Ladner Gervais LLP (BLG) represented Harry Winston in the transaction process, which resulted in an agreed purchase price of US$500 million, subject to adjustments in accordance with the terms of the share purchase agreements. The closing is targeted for March 2013. See here for more information.
Canadian Year-End Tax Planning Deadlines for 2012
As the end of 2012 approaches, taxpayers should be aware of some important tax planning deadlines in Canada. Some of these are recurring issues that arise every year, while others are specific to the end of 2012. In either case, it is useful to review some of the most important of these pending deadlines in order to ensure that opportunities for reducing or eliminating Canadian taxes are not missed. These deadlines are discussed below in relation to a corporation that is resident in Canada for Canadian tax purposes (Canco). Table 1 summarizes the special year-end tax deadlines for 2012 discussed below. See here for more information.
August 14 Draft Legislation Targets Foreign-Owned Canadian Companies
The Canadian federal budget of March 29, 2012 (“2012 Budget”) contained a variety of provisions directed at Canadian subsidiaries of foreign companies (see here for prior commentary). On August 14, 2012, the Department of Finance released draft legislation that would enact many of these proposals and which contain some variations from the initial announcements in the 2012 Budget. This bulletin identifies who is affected by these proposals and how (summarized in the table below). See here for more information.
Mining Taxation Strategies
Expert Guidance for Successfully Confronting the Challenges of Domestic and Foreign Mining Taxation, INFONEX, October 23 and 24, 2012, Toronto, Ontario, Co-Chaired by Steve Suarez. See here for more information.
Canada-Colombia Tax Treaty In Force
On July 10, 2012, the Department of Finance announced the entry into force of the income tax convention between Canada and Colombia signed on November 21, 2008. The new treaty will be applied by Canada (1) in respect of withholding taxes, on amounts paid or credited after January 1, 2013, and (2) in respect of all other income taxes for taxation years beginning on or after January 1, 2013. See here for more information.
The U.S. – Latin American Tax Planning Strategies Conference
This Conference addresses key tax issues for a wide range of in-house and outside tax and finance personnel doing business in the U.S. and Latin America. Case studies will underscore the effect of treaties, court decisions and domestic laws to provide insight into local planning opportunities. Panels will feature industry speakers, leading practitioners and government representatives offering the latest perspectives from the U.S. and Latin America on such topics as cross-border mergers and acquisitions, financing and transfer pricing. See here.
Canadian Federal Budget Includes Important Tax Changes
On March 29, 2012, the Canadian federal budget was released by the government of Canada. The budget includes a number of important tax changes, including some of particular interest to the mining community. See here for full commentary on these developments.
Ontario Budget Proposes Review of Provincial Mining Tax System
On March 27, 2012, Ontario Finance Minister Dwight Duncan presented the 2012 Ontario budget. With a projected deficit of $15.2 billion in 2012-13, the Budget reveals a provincial government in need of additional revenues. While there are relatively few tax measures in the Budget, it does freeze Ontario’s general corporate income tax rate at 11.5%, a change from the planned reduction to 11% that had been scheduled for July 1, 2012 and further reduction down to 10% that had been scheduled for July 1, 2013. Most important to the mining community is the Budget’s announcement that the government will be reviewing the provincial mining tax system in Ontario “to ensure that Ontario receives fair compensation for its non-renewable resources.” While no details were offered (see the relevant excerpt from the Budget materials below), clearly the government is interested in increasing its share of revenues from mining within the province. Mining companies considering new projects or the expansion of existing ones will need to consider the possibility of higher Ontario mining taxes in making business decisions, and the mining community should prepare to get actively involved in the review process in order to ensure that its concerns are heard and accounted for in any revision to the provincial mining tax regime. Excerpt From Ontario Budget 2012 Ontario has the highest value of mineral production of any province or territory in Canada. In 2011, the value of metallic and non-metallic mineral production in the province was estimated to be almost $10.7 billion. The Mining Tax Act levies a tax on profits from the extraction of minerals (except diamonds) in Ontario. The primary purpose of the mining tax is to ensure that Ontario receives fair compensation for its non-renewable resources. Ontario collected approximately $140 million in mining tax in 2010–11. Ontario has introduced several mining tax incentives over the years that were designed to encourage investment at a time when Corporate Income Tax rates were high. Since Ontario mining operations have benefited from the recent steps taken by the Province to create an internationally competitive tax regime, the government is proposing to work with stakeholders in reviewing the current system to ensure Ontario receives fair compensation for its non-renewable resources. See here for Ontario budget materials.
Australia Enacts Mining Tax
Legislation enacting the controversial Minerals Resource Rent Tax was passed by Australia’s upper house of Parliament on March 19, making the MRRT effective on July 1. This new 30% tax on iron ore and coal miners is expected to raise over $11B in its first three years. For more information, see here.
No Treaty Reduction on Resource Royalty, CRA Opines
In a technical interpretation dated February 1, 2012, the CRA responded to an inquiry as to whether an oil royalty payment made from a Canadian company to a U.S. resident would be subject to Canadian non-resident withholding tax at the full 25% rate provided for in the Income Tax Act (Canada) or whether the reduced 10% rate applicable to royalties in Article XII of the Canada-U.S. Income Tax Convention (the Treaty) would apply. The CRA reviewed the definition of “royalties” in Article XII(4) of the Treaty, and concluded that an oil royalty payment did not come within the scope of that definition. Instead, the payment would be covered by Article VI(2) of the Treaty (Income From Real Property), which does not restrict Canada’s right to tax. As such, the CRA concluded that the full 25% withholding tax was applicable. See CRA document 2011-0431571E5.
No Expansion of CRA Farm-Out Administrative Policy
The CRA has declined to expand its administrative policy on farm-outs in Interpretation Bulletin IT-125R4, “Dispositions of Resource Properties” (available here). Farmouts are an exploration and development financing technique common in the resource industry. Under a farm-out, the owner of the resource property (the “farmor”) grants an interest in the property to another party (the “farmee”) who has capital available and agrees to carry out exploration or development work on the property, thereby earning an interest in the property. The extent of the interest retained by the farmor and acquired by the farmee depends on whatever agreement the parties reach, and there are many variations on the concept. In mining, a farm-out might occur when, for example, a prospector or junior exploration company has made a discovery of interest and lacks the financial resources or expertise to prove or develop the claim. IT-125R4 describes a number of common farm-out arrangements that do not create proceeds of disposition for the farmor, under the CRA’s policy. In technical interpretation 2011-0420451E5 (dated 22 November 2011), the CRA declined to expand this administrative concession to a purchaser who pays annual amounts to acquire rights with respect to claims and who incurs expenses in relation thereto.
IBA Mining Taxation and Financing Conference May 3-4
On May 3-4, the International Bar Association is hosting “Mining Taxation and Financing: the Essential How-To Conference” in Toronto. This two-day conference will provide participants with an analytical framework for understanding mining tax and finance at all stages of the business, from exploration to development to sale or closure. See here for registration details.
Increase in Chinese Mining Taxes
Effective February 1, 2012, China is increasing resource taxes on a variety of minerals, including molybdenum, magnesium, talc, and boron, iron and tin, according to a report in the Shanghai Securities News. These increases are intended to encourage conservation and reduce pollution. Tin producers in particular are expected to be affected, as China is the world’s leading producer and an increase in production costs due to these taxes may be difficult to pass on. The tin ore resource tax is increasing from between $.09 to $0.16/ metric ton to between $1.91 to $3.18/metric ton. These increases follow earlier tax hikes in 2011 on rare earth metals and coking coal. See here for more.
Ontario Commission Recommends Mining Tax Review
On February 16, 2012, the Commission on the Reform of Ontario’s Public Services (headed by Don Drummond) released its report, “Public Services for Ontarians: A Path to Sustainability and Excellence.” The Report contains a wide range of recommendations relating to provincial expenditures and the delivery of public services in Ontario in order to prevent provincial finances from becoming unsustainable. While tax measures were not included in the Commission’s mandate, the Commission nonetheless recommended eliminating the Ontario resource tax credit, on the basis this measure was originally introduced to encourage investment at a time of high corporate income tax rates, which have been significantly reduced in recent years. The Commission also recommends a general review of the provincial mining tax system, “to ensure that the province is supporting the exploration and production of minerals in Ontario while receiving a fair return on its natural resources.” The provincial government has not yet commented on this aspect of the Commission’s recommendations, but mining companies operating in Ontario should be prepared for potentially unfavourable developments in this area. See here for the relevant excerpt from the Report, the complete version of which is available at http://www.fin.gov.on.ca/en/reformcommission/.
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 or hybrid 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.