When considering the manner in which mining operations are taxed in Canada, it is useful to distinguish between two distinct forms of taxation:
Income taxes: Canadian income taxes apply to virtually all forms of business activity that are either carried on in Canada or are carried on by a resident of Canada. These taxes are levied on the net (or “taxable”) income of the entity conducting the business (including mining operations). For each taxation year, the taxpayer determines its income, and then subtracts permissible expenses and other deductions to produce the remaining amount (”taxable income”). Tax is then levied as a percentage of taxpayer’s taxable income for the year. In some cases taxes payable are reduced by “tax credits” (reductions in tax payable, as opposed to deductions made in computing taxable income). Income tax is levied at both the federal (i.e., national) and provincial levels, and generally provincial income tax is computed using essentially the same rules as are used under the federal legislation (the Income Tax Act (Canada) (“ITA”)).
Mining taxes: separate and apart from income taxes, the provinces and territories of Canada (but not the federal government) levy specific taxes on mining operations (typically the extraction of minerals from the ground). These provincial mining taxes are generally deductible in computing taxable income for federal income tax purposes. In general provincial mining taxes allow for fewer deductions in computing the amount on which tax is levied.
In general terms, the taxation system approaches mining as consisting of three distinct stages:
- exploration and development;
- commercial production (generally considered to begin at the commencement of the first 90-day period in which the mine is operating at least 60% capacity); and
- processing (i.e., smelting and refining).
Sales & Other Taxes
Canada also has sales taxes at the federal level, as well as at the provincial level in some provinces. The federal goods and services tax (“GST”) is a value-added tax levied at a 5% rate on the consumption in Canada of most property and services (there are a few notable exceptions such as most financial services). GST-registered businesses that make taxable supplies of property and services in Canada must collect the applicable 5% GST on their sales and remit it to the Canada Revenue Agency (“CRA”), and may claim an “input tax credit” in respect of (essentially a refund of) any GST they themselves pay on purchases of taxable goods and services used in their business. The result is that the GST is effectively borne only by the final consumer, and in the mining sector GST is largely a compliance matter, i.e., collecting and remitting the tax on sales in Canada and claiming input tax credits on GST paid on business inputs.
Persons carrying on business in Canada (whether resident or non-resident) are required to register themselves for GST purposes as a general rule, subject to certain specific exceptions. Non-residents soliciting orders in Canada may be deemed to carry on business in Canada, and a non-resident with a permanent establishment in Canada is deemed to be a Canadian resident with respect to the activities carried on through that permanent establishment. Unregistered business cannot claim input tax credits for GST they pay, and in some cases it may be advantageous for an eligible non-resident to register for GST purposes in order to claim input tax credits for Canadian GST it pays. Where an unregistered non-resident supplies a good or service to a Canadian customer, the customer may be obligated to self-assess GST in certain circumstances. The application of the GST to cross-border transactions often involves difficult interpretational issues (e.g., what it means to “carry on business in Canada”) and/or special rules. For more on the GST and non-residents of Canada see here.
Many of the provinces have eliminated their provincial sales tax (“PST”) and instead receive a share of a higher federal sales tax (a harmonized sales tax or “HST”) that is essentially the GST levied at a higher rate in that province, and which combines the 5% federal component and a provincial component that varies by participating province. Quebec’s sales tax very closely mirrors the federal GST but is not fully harmonized (Quebec administers the GST in Quebec on behalf of the federal government). Some other provinces levy completely separate PSTs, while Alberta and the territories levy no sales tax. In 2013, British Columbia is reverting from an HST back to a separate PST, while Prince Edward Island is replacing its PST with an HST. The rates of GST, HST and PST are set out in the table below.
|British Columbia||12% HST||─|
|Nova Scotia||15% HST||─|
|New Brunswick||13% HST||─|
|Prince Edward Island||5% GST||10%|
|Northwest Territories||5% GST||─|
|Yukon Territories||5% GST||─|
The Canadian income tax system distinguishes between residents of Canada (generally taxable in Canada on world-wide income) and non-residents of Canada (subject to Canadian tax on most forms of Canadian-source income). There is no comprehensive definition of Canadian residence: the ITA deems a person to be a resident of Canada in certain circumstances, but does not comprehensively define this term. Instead, the courts have developed various principles over time for determining whether a person is resident in Canada or not. The determination of residence made under Canadian law may be over-ridden or superseded by a tax treaty between Canada and another country.
A corporation incorporated in Canada after April 26, 1965 is deemed to be a resident of Canada under the ITA. Otherwise, under the common law principles developed by the courts a corporation will be considered to be resident in the jurisdiction in which its “central management and control” is located. A corporation’s central management and control is generally considered to exist wherever the corporation’s board of directors exercises its general supervisory powers, although if this level of decision-making is effectively being made by others (e.g., controlling shareholders) then the determination of residence may be made with reference to the location of those other persons in making these decisions. It is highly important for corporations to carefully monitor the location of its central management and control, since the implications of the corporation’s fiscal residence on its tax liability are dramatic. See here for more on corporations.
1. Residents of Canada
Under the ITA, residents of Canada for income tax purposes are subject to tax on their world-wide income (i.e., that earn in Canada and elsewhere). Income from each separate “source” (e.g., a business, investment, employment, etc.) is calculated and tax owing is determined as described above. Natural persons pay tax on a graduated or progressive basis (the tax rate on lower amounts of income is less than on higher amounts), while corporations generally pay tax at a “flat” rate (i.e., the same rate of tax applies no matter how much income is earned). The general rate of federal income tax on active business income earned by a corporation for 2012 is 15%. For a summary of applicable rates of tax, see here.
Computation of Income and Loss
Under Canadian income tax law, it is generally necessary to distinguish between amounts on income account and amounts on capital account. Income items (revenue or expenses) are fully includable income (or for expenses, deductible from) the taxpayer’s taxable income. Conversely, only 50% of capital gains are included in income and subjected to tax, and expenses that are capital in nature are generally not deductible in computing income (although in many cases rules exist that permit them to be deducted over a period of years. While distinguishing between income and capital gains is a highly judgmental issue that probably generates more disputes between taxpayers and the CRA than any other, in very general terms capital gains typically arise from the disposition of property (capital property) acquired for producing income from holding or using the property (for example, production equipment), as opposed to a property held to make a profit on reselling the property (for example, inventory).
Income is determined for each year, on an accrual basis (i.e., income and expenses are recognized as they are earned or incurred, rather than when received or paid). Income from a business is determined as the profit therefrom, determined under well-accepted commercial principles and then adjusted by various specific rules in the ITA. If the taxpayer’s losses from businesses and investments for the year exceed the sum of the taxpayer’s income from businesses and investments plus net taxable capital gains, that excess is the taxpayer’s noncapital loss for the year. The taxpayer’s noncapital loss for a particular year may be applied against income (or net taxable capital gains) in other years, subject to various restrictions. Hence, the taxpayer’s net capital loss and noncapital loss can be thought of as excess losses for a particular year that can be used in other years. The taxpayer’s noncapital loss for a particular year may be carried back and used against income in the three most recent prior taxation years or carried forward and used in the 20 immediately subsequent taxation years.
Each year, the taxpayer totals 50% of any capital gains realized in the year (taxable capital gains) and subtracts 50% of any capital losses realized in the year (allowable capital losses). If the net amount is positive, that excess (net taxable capital gains) is added to the taxpayer’s overall income for the year. However, if allowable capital losses exceed taxable capital gains, the excess is not deductible against business or investment income in computing overall income. Instead, it is treated as the taxpayer’s net capital loss for the year, which (subject to some limitations) may be carried back and used against net taxable gains in the three most recent prior taxation years or carried forward and used against net taxable gains in any future taxation year.
The distinction between capital losses and business/investment losses is an important one for various reasons:
- only 50% of a capital loss (the allowable capital loss) is recognized by the tax system;
- capital losses are only deductible against capital gains, whereas business/investment losses can be deducted against any income or taxable capital gain;
- excess business/investment losses for a year (that is, noncapital losses) have different rules for application in other years than excess capital losses for a year (net capital losses); and
- a corporation’s capital losses are treated differently from its noncapital losses on an acquisition of control of the corporation. See here for more on this topic.
Generally a taxpayer’s Canadian tax results must be computed in Cdn.$, although under certain conditions it is permissible to elect to compute Canadian taxes under the taxpayer’s foreign “functional currency.”
Non-residents of Canada are subject to Canadian income tax on (1) income from carrying on business in Canada, (2) income from employment in Canada, or (3) capital gains realized upon disposing of certain forms of Canadian-situs property (“taxable Canadian property”). If they engage in these activities and no applicable tax treaty (see below) applies to provide relief, then in general they compute their income from (and pay tax on) these Canadian activities in essentially the same manner as described above. “Taxable Canadian properties” include land in Canada (or an interest therein) and shares of a corporation or interests in a partnership that derive more than 50% of their value (directly or indirectly) from land or natural resources in Canada at any time during the immediately preceding 5 years. Shares listed on certain stock exchanges will not be taxable Canadian property unless the foreign shareholder also meets a 25% ownership threshold within the past 5 years. See here for more on taxable Canadian property.
Non-residents are also subject to Canadian withholding tax (also called Part XIII tax) on payments of passive, investment-type income from Canada (typically where the payer is a Canadian resident). The most prominent examples of income subject to Part XIII tax are dividends, interest (if paid between non-arm’s-length persons or if the interest is participating interest), rents and royalties. The rate of tax is 25% of the gross amount of the payment, with no deductions permitted.
In the case of both regular income tax and withholding tax, the rules in the ITA are subject and subordinate to the terms of any tax treaty Canada has entered into with the country where the particular foreign taxpayer resides. Such a tax treaty may reduce or eliminate Canadian taxes otherwise owing under the ITA, depending on what country the foreign taxpayer is resident in (tax treaties contain rules for determining whether someone is a resident of one country or the other) and what the terms of the particular treaty say. For example, virtually all of Canada’s tax treaties (where applicable):
- prevent Canada from taxing a non-resident who carries on a business in Canada, if the business is not carried on through a permanent establishment (e.g., a place of business) within Canada;
- reduce the rate of withholding tax on dividends, interest and royalties; and
- reduce the scope of properties that Canada may tax gains from the disposition of.
As such, in most cases foreigners will structure their Canadian investments and activities through a jurisdiction with which Canada has a tax treaty. For a list of Canadian tax treaties, see here.
Overview of Canadian Taxes on Mining
|Federal Income Tax||Canadian residents taxable on worldwide income; foreign tax credits for foreign-source incomeIncome computed for each “source”; certain deductions permitted in computing “taxable income”; applicable tax rate then applied to determine tax payableSubject to treaty relief, non-residents subject to:
• withholding tax on Canadian-source passive income
• normal income tax on Canadian-source business income and some capital gains
|Provincial Income Tax||Generally computed the same as federal income tax (different rates), subject to some differences|
|Provincial Mining Tax||Significant variation among provinces, but generally levied as a percentage of mine output; deductible for income tax purposes|
|Other Taxes||5% federal value-added goods and services tax; most provinces levy a corresponding (harmonized) sales tax; payroll and land transfer taxes|