Overview of Main Tax Instruments
Corporate Income Tax
The federal government, the ten provinces and the three territories all levy a tax on corporate income. The Canadian income tax system establishes income tax liability based on two concepts: type of income sources and residence.
Types of income sources
Canadian income tax law (both federal and provincial/territorial) recognizes four main types of income sources: business, property, employment and capital gains. Income from a property source connotes passive income (such as rent, interest, royalties and dividends) earned through investment (as opposed to business) activities.
Residence of a corporation
In determining whether a person is resident in Canada, Canadian concepts of residence generally apply. However, the application of the residence concepts is subject to the rules in effect in bilateral income tax treaties.
A corporation will generally be resident in Canada if it has been incorporated in Canada. A corporation that has been incorporated in a foreign jurisdiction will be considered a Canadian resident if its central management is located in Canada. The central management and control of a corporation is generally located in the country in which essential decisions are made.
Canadian resident corporations are taxed federally on their worldwide income regardless of their geographic source. Due to Constitutional restrictions, the provinces and territories levy an income tax only on income earned in the province or territory. Income that is not earned in a province or territory is not subject to provincial or territorial income tax, but is subject to a higher rate of federal income tax. If a Canadian resident corporation earns income from a source outside Canada, it will generally be entitled to a tax credit, applicable to its otherwise payable Canadian corporate income tax, for some or all of the foreign tax paid. Canadian income tax imposed on non-resident corporations is restricted to Canadian-source income.
The Income Tax Act (ITA) contains two main forms of income taxes and several forms of other minor taxes. Of most relevance to mining are Parts I and XIII of the ITA. Part I of the ITA imposes a tax on net income. It applies to all income earned by Canadian residents, regardless of types of income source. Part I tax also applies to non-residents, but only insofar as they earn income from Canadian employment or business activities or realize capital gains in respect of certain types of Canadian assets.
Part XIII of the ITA (also referred to as the withholding tax) imposes a tax on gross income, with no provision for deductions. It applies principally to property income earned by non-residents and to certain administration and management fees that are paid to non-residents.
General federal income tax provisions are discussed in more detail under the subsection on corporate income tax rules of general application of the section entitled The Federal Corporate Income Tax Regime; rules specific to mining are presented under the subsection Mining-specific income tax provision. Income tax rates that currently apply for the federal income tax and the provincial/territorial income taxes are presented in Table X of the section on tables on the structure and rates of main taxes.
The federal government, in addition to collecting federal income tax, collects the corporate income taxes levied by seven of the provinces and by the three territories. The provinces of Alberta, Ontario and Quebec administer their own corporate income tax systems.
Taxable income is computed similarly by all jurisdictions, including those with a separate tax administration. With relatively minor variations, the rate of tax of the provinces and territories can approximately be applied to the computation of income for federal corporate income tax purposes.
Withholding Tax
Non-residents that are not subject to Part I income tax must pay a withholding tax (Part XIII tax) on the gross amounts of enumerated types of Canadian-source property (i.e., passive investment) they receive from, or get credited for by, Canadian taxpayers. The rate of the withholding tax that applies varies according to the country of origin of the non-resident. The general rate is 25 percent. It is lower for a non-resident of a country with which Canada has signed a tax treaty. The extent of Canada's tax treaty network is discussed in the section covering the Canadian tax regime in the context of the global economy, under the subsection on international taxation.
Capital Taxes
Capital tax is tax that is levied on a corporation's capital (assets) rather than its income. Capital tax rates may vary according to a corporation's size (e.g., large corporations) or sector (e.g., financial institutions). Exemptions may also apply.
The federal Large Corporations Tax, which was imposed on corporations with capital in excess of $10 million, was eliminated as of January 1, 2006. The provinces of Nova Scotia, Quebec and Manitoba still levy a tax on the capital of most active business corporations, including mining. Taxable capital generally consists of the aggregate of a corporation's equity and capital indebtedness, less an allowance for its loans receivable and certain investments. The taxable capital is usually allocated among the provinces in the same manner as taxable income. The tax on capital is normally deductible for income tax purposes, subject to restrictions defined by remission order. Restrictions effectively prevent the claiming of the portion of capital tax that is the result of an increase in the provincial/territorial capital tax rate that occurred after a certain date.
Generally, provincial capital taxes are in the process of being reduced or phased out. Provincial/territorial capital tax rates are presented in Table Y of the section on tables on the structure and rates of the main taxes.
Mining Taxes and Crown Royalties
All provinces and territories having significant mining activities impose mining taxes and/or mining royalties and/or mineral land taxes on mining operations within their jurisdictions. This is a third level of taxation, separate and distinct from federal and provincial/territorial income taxes. These mining levies are intended to compensate the province or territory for the extraction of non-renewable resources owned by it.
The provinces of British Columbia, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, and Newfoundland and Labrador -- and the federal government in respect of mines in the Yukon, Nunavut and Northwest Territories -- all impose mining taxes on defined mining profits. With the exception of the British Columbia Mineral Tax Act, the mining taxes are conceptually levied on profits derived from the operations at the mining stage only. Practically, since no fair market value of production can reasonably be established at the mining stage, the starting point of the tax computation is generally the profits from both mining and processing operations, with the deduction of a processing allowance that removes from taxable profits a given return on the investment in processing assets. The processing allowance is computed as a given percentage (representing the allowed rate of return on processing investment) of the original cost of the processing assets. There are provisions that the allowance cannot exceed a stated percentage (usually 65 percent) of the combined mining and processing income calculated before the processing allowance. In some cases, a minimum percentage of mining and processing profits is allowed when this calculation yields a higher deduction than the one given by the application of the allowed percentage of processing asset cost.
Each of the statutes permits a deduction (at varying rates) for depreciation of mining and processing assets and for the amortization of pre-production expenses. However, none of the statutes allows a deduction for the cost of the mineral property, the exploration expenses carried out outside the province, and depletion or interest expenses. Only Newfoundland and Labrador and New Brunswick allow a deduction for non-Crown royalties because these two provinces tax the recipient of such royalties. British Columbia is the only jurisdiction that currently provides relief for operating losses of prior years.
A table illustrating a typical calculation of mining taxes for provinces and territories permitting the deduction of a resource allowance is presented below.
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Amounts are in thousands of dollars |
Year X | Year X+1 | Year X+2 | Year X+3 | |
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| Net Income | 2000 | 2000 | 2000 | 1000 | |
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Depreciation of original assets |
1000 | 0 | 0 | 0 | |
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Replacement capital |
0 | 0 | 500 | 0 | |
| Exploration | 1000 | 200 | 100 | 0 | |
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Income before processing allowance |
0 | 1800 | 1400 | 1000 | |
| Processing allowance | 0 | 800 | 800 | 650 | |
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Taxable income |
0 | 1000 | 600 | 350 | |
1 Model Assumptions:
- Initial capital cost of processing assets = $10M.
- Non-depreciated capital cost $1M at the beginning of Year X.
- Processing allowance is the minimum of 8% of original cost of processing asset and 65% of income before the processing allowance.
Some provinces do not follow the conventional model of mining taxes described above. For example, Alberta has a mining tax only on gold, but imposes various royalties that vary by specific mineral product. Also, royalty rules applying to tar sands mining are project-specific.
Saskatchewan imposes a series of levies, generally not related to profitability, on potash producers. Uranium producers are subject to a basic royalty of 5 percent of gross income plus a graduated royalty rate schedule on operating profits.
Taxes on Goods and Services and Sales Taxes
Goods and Services Tax (GST)
A 5-percent value-added tax, called the Goods and Services Tax (GST), is charged on the supply of goods and services within Canada where such supplies are not exempt or subject to a zero rate of tax. The GST is charged on imports but exports are zero rated. Exempt categories are groceries, most medical services and devices, prescription drugs and residential rents. The GST applies at each stage of the production and distribution chain. To ensure that the tax applies only once to the final consideration paid for a consumer expenditure, registered businesses are entitled to credits for tax paid on inputs into making taxable supplies.
Since 1996, a single harmonized value-added tax, the HST (Harmonized Sales Tax) has replaced the provincial retail sales taxes and the federal Goods and Services Tax (GST) in Nova Scotia, New Brunswick, and Newfoundland and Labrador. It is applied at a single rate of 14 percent on the same categories of goods and services as the GST. Effective July 1, 2010, Nova Scotia’s HST becomes 15%. In addition, two more provinces, British Columbia and Ontario, adopted the HST approach, with a single rate of 12% for the former and 13% for the latter. For more information on the GST and the HST, visit the Canada Revenue Agency's Goods and Services Tax (GST) and Harmonized Sales Tax (HST) web page.
The Government of Quebec also applies a separate 8 percent value-added tax (Provincial Sales Tax or PST) on a tax base that is similar to the federal GST base. The PST tax base also includes the federal GST.
Sales taxes
A sales tax is applied as a percentage of the final purchase price of a good or service when they are sold. Sales taxes are considered to be direct taxes since the burden of paying sales taxes is borne by the final consumer and cannot be transferred to another person.
No sales tax is imposed at the federal level. At the provincial level, sales taxes are applied only in jurisdictions other than Alberta, the territories and provinces where value-added taxes are imposed instead. Provincial sales tax rates vary from 6 percent to 10 percent.
Customs duties
Customs duties are taxes that are levied upon goods and services that are imported into Canada.
Fuel taxes
Both the federal and provincial/territorial governments impose excise taxes on motor fuels, such as diesel and gasoline. The current federal rates is 10 cents per litre for gasoline and 4 cents per litre for diesel.
Property Taxes
Property taxes are direct taxes that are imposed by municipalities or regional governments. They are normally applied as a percentage of the assessed value of land, buildings and other real estate. The assessed value for determining the property tax amount may be determined by a number of different factors, including acquisition cost and fair market value. The portion of property taxes imposed on property that is used to earn income is deductible from income in the determination of corporate income tax.
Other Taxes and Levies
Transaction taxes