Mining activities—including concentrating, smelting, and refining—are eligible for the following special tax treatments under Canada’s corporate income tax laws:
- Deduction of Provincial/Territorial Mining Taxes and Royalties
- Capital Cost Allowances
- Accelerated Capital Cost Allowances
- Canadian Exploration Expense claims
- Canadian Development Expense claims
- Qualifying Environmental Trusts
- Foreign Resource Expense and Foreign Exploration and Development Expense claims
- Flow-through shares and the Mineral Exploration Tax Credit
Provincial and Territorial Mining Taxes and Royalties Deduction
Mining taxes and royalties paid to a province or a territory with respect to income from a mineral resource are fully deductible when computing income for federal income tax purposes.
Capital Cost Allowances
Most capital assets acquired by mining and oil and gas companies qualify for a depreciation rate of 25% on a declining balance basis. The depreciation of tangible assets is allowed under the system of capital cost allowances (CCA). The capital cost of each particular depreciable asset used to gain or produce resource income is allocated to the appropriate class of assets for which a maximum annual depreciation rate is prescribed. Government assistance, such as grants and investment tax credits, plus proceeds of disposition of assets (not exceeding the acquisition cost), are deducted.
Accelerated Capital Cost Allowances
In addition to the normal 25% rate of depreciation accorded to capital assets, the accelerated capital cost allowance (ACCA) can provide for a depreciation allowance of up to 100% of the asset cost. Assets must have been acquired before the start of commercial production or major expansions, or for the portion of investment expenditures in excess of 5% of the gross income.
ACCAs for oil sands projects were phased out in 2014. ACCAs for mining, as proposed in Budget 2013, will be phased out over 2017-2020 as follows:
Canadian exploration expenses (CEEs) are those incurred by the taxpayer for determining the existence, location, extent, or quality of a mineral resource, or petroleum or natural gas, in Canada. Until 2018, CEEs also include some expenses involved in bringing a new mine into production, including clearing, removing overburden, and stripping and sinking a mine shaft. CEEs are 100% deductible in the year in which they occur. Taxpayers can carry unused balances forward indefinitely, or transfer them to flow-through share investors.
See Section 66.1(6) of the Income Tax Act for more information.
The basic FRE deduction for each country is an amount comprising between 10% and 30% of the cumulative FRE balance for that country, the upper limit being restricted to the amount of available foreign resource income for that country. However, a supplemental FRE deduction may be permitted if the country limitation results in a global FRE claim of less than 30%. With this supplemental deduction, total FRE deductions are allowed to reach up to a maximum of 30% of a taxpayer’s total cumulative FRE balances to the extent of available global foreign resource income.
FEDE and FRE include, subject to applicable date restrictions:
- Expenses incurred in respect of exploration and drilling for petroleum and gas outside Canada;
- Exploration and development expenses incurred in searching for minerals outside Canada;
- The cost of acquiring foreign resource properties;
- Annual foreign lease rental payments; and
- The “at risk” portion of the corporation’s share of any of the above expenses from a partnership.
Canadian Development Expenses
Canadian development expenses (CDEs) are those incurred in:
- Sinking or excavating a mine shaft, main haulage way, or similar underground work for a mine in Canada built or excavated after the mine came into production
- Pre-production mine development expenses (after 2017)
- The cost of any Canadian mineral property
CDEs can be deducted at a 30% declining balance. Unclaimed balances can be carried forward indefinitely or transferred to flow-through share investors (excluding the cost of any Canadian mineral property).
See Section 66.1(6) of the Income Tax Act for more information.
Qualifying Environmental Trusts
Under a qualifying environmental trust (QET), contributions to qualifying mine reclamation trusts can be deducted in the year in which they occurred for income tax purpose.
Foreign Resource Expense and Foreign Exploration and Development Expense claims
Canadian mining companies that incur exploration and development expenses abroad can claim the Foreign Resource Expense (FRE) on a country-by-country basis for income tax purposes. The basic FRE deduction for each country is between 10% and 30% of the cumulative FRE balance for that country, with the upper limit restricted to the amount of available foreign resource income for that country. However, a supplemental FRE deduction may be permitted if the country limitation results in a global FRE claim of less than 30%.
Note: Before 2001, all foreign exploration and development expenses incurred by a Canadian corporation were accumulated in one global tax "pool" called the Foreign Exploration and Development Expense (FEDE) balance. If an FEDE pool still exists, the corporation must first take an FEDE deduction equal to the available foreign resource income of the year or 10% of the available FEDE, whichever is greater.
A flow-through share (FTS) allows a principal business corporation (PBC) to obtain financing for expenditures on mineral exploration and development in Canada.
By issuing flow-through shares, a company can “flow through” certain expenses to the share purchaser. These expenses are then deemed to have been incurred by the investor, not the corporation, which can reduce the investor’s taxable income.
For individual investors, the advantages can be twofold:
- They receive a 100% tax deduction for the amount they invested in the shares, plus a 15% tax credit in the case of an eligible expense.
- They may see their investment appreciate if the exploration is successful.
FTS-issuing corporations do not have to be Canadian, but they must be Canadian taxpayers that incur the expenses in Canada on qualified activities. Resource expenses that may be flowed through include Canadian exploration expenses (CEEs) and certain Canadian development expenses (CDEs).
Mineral Exploration Tax Credit
The Mineral Exploration Tax Credit (METC) is a 15% credit designed to help exploration companies raise equity funds in addition to the regular tax deduction associated with flow-through share investments. The METC was intended as a temporary countercyclical incentive when it was introduced. It is scheduled to expire on March 31, 2016.
- Date Modified: