A Guide to Canadian Mining Taxation - KPMG US LLP | KPMG

A guide to Canadian mining taxation

Third Edition

February 2016 kpmg.ca/mining

Preface

This is the third edition of A Guide to Canadian Mining Taxation, which we publish bi-annually.* For the past three to four years, the mining industry has been wrestling with a combination of issues it has not experienced before. Economic stagnation in emerging markets has softened commodity prices, stemming mining revenues and disenchanting investors. How much capital will eventually flow back to mining equities is in doubt, given the success of commodities ETFs. At the same time, mining companies have been struggling to control operating and capital costs that threaten their margins. In these circumstances, many mining companies have been more concerned about protecting the business than growing the business.

To protect their businesses, mining companies have needed to rely on risk management and carefully crafted financial strategies that preserve value. Taxation is an important piece of this puzzle, and we are proud to contribute our updated guide to a field that is becoming more complex with each passing year. Global mining operates across a plethora of national, regional and local jurisdictions, most of which engage the mining industry with their own policies, regulations and taxes.

When mining is in a rising commodity price cycle, as it was in the first decade of this century, governments tend to raise mining taxes to capture a higher share of profits. When mining reverts to a falling commodity price cycle, as it is doing now, governments take time to adjust to the new reality. Although the industry is now showing signs of stabilizing, external business conditions such as the global economy and commodity prices do not herald a return to growth in the short term. Looking farther out, however, we continue to see a very bright future for the mining industry in Canada. Much potential economic growth remains in emerging markets (the world's major mining markets) and many companies have taken impressive steps toward stabilizing their financial issues.

As this edition of A Guide to Canadian Mining Taxation goes to press, two issues are capturing global attention. The first is base erosion and profit shifting (BEPS), a tax-specific ethical issue. Governments are formally expressing concern about erosion of their tax bases by multinational corporations that can exploit inter-relationships and treaties among global jurisdictions. News media have reported the story as corporations unwilling to pay their fair share of taxes. The Organization for Economic Co-operation and Development (OECD) has made recommendations to empower governments, and some changes are beginning to appear. We expand on BEPS in a section beginning on page 97.

The other potentially larger issue is the new Canadian and global resolve to halt climate change. Canada's new federal government is enthusiastic about this movement, and several provinces are in alignment. Alberta, most notably, has announced a new climate change agenda that will have consequences for the Province's coal industry as well as the oil sands. Moreover, the US has now formally rejected the Keystone XL pipeline. We await further developments in this area and expect some global impacts on all extractive industries.

We hope this book will be a helpful summary of the main features of our current mining tax regime. Readers who require further information or assistance are invited to contact any of KPMG's mining professionals listed on the following page.

*We would like to express our sincere appreciation for the significant contributions made by Brian Carr in the creation of the first two editions of this book. Without Brian's tireless efforts and passion, we would not be in a position to release this third edition.

Statements of law in this book are current to December 31, 2015.

Scott Jeffery Partner & General Editor

? 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

KPMG's Mining Tax Contacts

If you require more information on the matters discussed in this publication, please call your local mining tax advisor. We welcome the opportunity to meet with you to discuss how we can best assist you.

Toronto 333 Bay Street Bay Adelaide Centre, Suite 4600 Toronto, Ontario M5H 2S5

Vancouver 777 Dunsmuir Street, Suite 900 Vancouver, British Columbia V7Y 1K3

Calgary Bow Valley Square II 205?5th Avenue SW, Suite 2700 Calgary, Alberta T2P 4B9 Saskatoon River Centre 500, 475 ? 2nd Avenue South Saskatoon, SK S7K 1P4 Montr?al 600 Boulevard de Maisonneuve Ouest, Bureau 1500 Montr?al, Qu?bec H3A 0A3 Halifax Purdy's Wharf Tower One 1959 Upper Water Street, Suite 1500, Halifax, Nova Scotia B3J 3N2

Lee Hodgkinson National Industry Leader, Mining

416-777-3414 lhodgkinson@kpmg.ca

Tom King, Canadian Corporate Tax Iain MacIntosh, Indirect Tax Ron Maiorano, US Corporate Tax Lisa Somers, Canadian Corporate Tax Lawrence Teltscher, Canadian Corporate Tax Penny Woolford, International Corporate Tax

Philippa Wilshaw, GVA Mining Industry Leader

416-777-8827 416-777-3121 416-777-8278 416-777-8543 416-777-8687 416-777-8906

604-691-3039

tking1@kpmg.ca iainmacintosh@kpmg.ca rmaiorano@kpmg.ca lsomers@kpmg.ca lteltscher@kpmg.ca pennywoolford@kpmg.ca

ppwilshaw@kpmg.ca

Jason Cooledge, Canadian Corporate Tax Karl Dennis, US Corporate Tax Scott Jeffery, Canadian Corporate Tax Jodi Kelleher, International Corporate Tax Tony Martin, International Corporate Tax Mark Worrall, Indirect Tax Angelos Xilinas, Indirect Tax

James Rowling, US Corporate Tax Bruce Weatherdon, Canadian Corporate Tax

604-691-3209 604-691-3045 604-646-6340 604-646-6305 604-691-3503 604-691-3106 604-691-3479

403-691-7947 403-691-7965

jcooledge@kpmg.ca kpdennis@kpmg.ca kjeffery@kpmg.ca jkelleher@kpmg.ca tonymartin@kpmg.ca mworrall@kmpg.ca axilinas@kpmg.cah

jrowling@kpmg.ca bweatherdon@kpmg.ca

Thomas Zurowski, Canadian Corporate Tax 306-934-6207 tzurowski@kpmg.ca

Hugues Lachance, Canadian Corporate Tax 514-840-2542 hlachance@kpmg.ca

Steven Moore, Canadian Corporate Tax

902-492-6069 stevemoore@kpmg.ca

? 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Table of contents

2 Introduction

3 Canada's Mining Industry 3 The Tax Environment 5 About This Book

6 Overview of the Canadian Tax Regime

7 Mining Activities 7 Forms of Organization 7 Income Taxation

9 Capital Gains 9 Utilization of Losses 10 Tax Administration 10 Filing Requirements and Tax Payments 10 Corporations 10 Individuals 11 Trusts 11 Partnerships 11 Federal Requirements 12 Qu?bec Requirements 13 Joint Ventures 13 Functional Currency Tax Reporting

14 Deductions, Allowances, and Credits

15 Canadian Exploration Expenses 16 Canadian Development Expenses 17 Canadian Oil and Gas Property Expenses 17 Foreign Resource Expenses 17 Successor Corporation Rules

18 Original Owner 18 Successor 19 Predecessor Owner 20 Amalgamations 21 Wind-Ups 21 Acquisition of Control

? 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

22 Capital Cost Allowance 22 Calculation of Capital Cost Allowance 24 Capital Cost Allowance for Industrial Mineral Mines

24 Flow-Through Shares 25 The Look-Back Rule 25 Stacking Arrangements 26 Use of a Limited Partnership 26 Dispositions of Flow-Through Shares 26 Advantages and Limitations of Flow-Through Shares

27 Investment Tax Credits 27 Pre-Production Mining Expenditures 27 Flow-Through Mining Expenditures 28 Atlantic Tax Credit 28 Scientific Research and Experimental Development Credit

29 Qualifying Environmental Trusts 30 Provincial Flow-Through Mining Tax Credits and Deductions

30 British Columbia 30 Saskatchewan 30 Manitoba 30 Ontario 30 Qu?bec 30 Other Provincial Credits and Adjustments 30 British Columbia Mining Exploration Tax Credit 30 Qu?bec Resource Tax Credit 31 Qu?bec Investment Tax Credit 31 Ontario Resource Allowance Adjustment

32 Structuring Mining Investments

33 Corporate Reorganizations 33 Tax-Deferred Transfers 34 Amalgamations 34 Wind-Ups of Subsidiaries

? 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

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