Amendments to Mining and Mineral Rights Tax Act
ensure province derives fair and reasonable revenues
while remaining competitive with other jurisdictions

Finance Minister Joan Marie Aylward has introduced legislation to amend the Mining and Mineral Rights Tax Act which will ensure that the province will derive fair and reasonable revenues from mining operations while maintaining a provincial mining tax regime that is competitive with other jurisdictions in Canada.

This legislation is generic � it applies to all new mining projects in the province. It ensures that the province will receive reasonable compensa\tion for the mineral resources which belong to the people of the province. The legislation, introduced in the House of Assembly last night, also provides for a stable and predictable tax regime which is competitive with other jurisdictions in Canada. This is necessary to encourage exploration and development.

The Mining and Mineral Rights Tax Act has been in place for 27 years. The basic structure of the act is not being changed. As indicated by the act�s title, there are two components to the tax, that is, the Mining Tax which applies to the mine operator, and the Mineral Rights Tax which applies to a person receiving mineral royalties which are based upon the value or quantity of production. This structure was implemented upon the recommendation of the Royal Commission on Mineral Revenue in 1974, and is designed to ensure that the province is reasonably compensated from those businesses profiting from the depletion of the non-renewable mineral resources which belong to the people of the province.

The Mining Tax imposed upon the mine operator has two sub-components with each of these sub-components being taxed at different rates. A 15 per cent tax rate, referred to as the mining operations tax, is payable on a portion of the mine operator�s income. In addition, the mine operator is liable for a tax at the rate of 20 per cent on the remainder of income. This 20 per cent tax on the mine operator is referred to as the deemed mineral rights tax.

The second major component of the tax is the Mineral Rights Tax. It applies at the rate of 20 per cent to a person receiving royalties from a mine operator or another person. There is a linkage between the 20 per cent deemed mineral rights tax payable by the mine operator and the 20 per cent mineral rights tax payable by the royalty recipient. If the mine operator pays a royalty, it is a deductible expense in determining the operator�s deemed mineral rights tax. This prevents double taxation of the same income. If the mine operator does not pay a royalty, he/she pays the full 20 per cent deemed mineral rights tax. In other words, a 20 per cent tax will be paid on a portion of the income from a mining project, either by the mine operator, a royalty recipient, or a combination of these.

In addition to miscellaneous amendments to enhance administration, compliance and enforcement, a number of significant changes are being proposed to address deficiencies with respect to the Mining Tax and Mineral Rights Tax and to strengthen other provisions of the act to ensure the province�s competitive position is maintained.

"The new Mining Tax Act will limit the Newfoundland and Labrador corporate income tax credit to $2 million for the first 10 years," said Minister Aylward. "This addresses concerns with the so-called tax holiday introduced in 1994, while still maintaining the province�s competitiveness with other jurisdictions." Under the current legislation, there is no limit on the corporate income tax credit for the first 10 years.

Modifications are also proposed in relation to the calculation of the processing allowance in order to encourage concentrating, milling, smelting and refining in the province. The current act provides for a minimum processing allowance of 15 per cent of net income, whether or not the mine operator actually undertakes processing. This minimum processing allowance will be eliminated under the amended legislation. Further, the act is being amended so that only those processing assets which are located in the province are eligible for the processing allowance.

"The amendments also provide incentives to encourage exploration," noted Minister Aylward. "Most significant is the implementation of a tax-free threshold of $100,000 annually on royalty income, with that relief being phased out by the time royalties reach $200,000. This will help ensure that prospectors who discover minerals receive a reasonable return on the find if their rights are sold for royalties." As another incentive for exploration, exploration expenses will be included as an eligible deduction in calculating the Mineral Rights Tax.

Amendments to the legislation also strengthen and clarify provisions with respect to the treatment of transactions between related parties; non-deductible cash payments made under impacts and benefits agreements; deductibility of royalties payable by mine operators; and, deductibility of certain expenses related to mine reclamation. Also, the current act restricts the carry forward of unused exploration expenses to a five-year period. This five-year restriction is being removed.

"The amendments to the Mining and Mineral Rights Tax Act will increase revenues while maintaining the province�s competitive position, and will encourage exploration and processing, supporting growth within the industry from the grassroots level up," said Minister Aylward.

Media contact: Josephine Cheeseman, Communications (709) 729-0329.

Amendments to the Mining Tax include:

• Limiting the corporate income tax credit (tax holiday) to $2 million annually for the first 10 years;
• Ensuring the processing allowance is available only for assets located in the province;
• Removing the minimum processing allowance;
• Clarifying that cash payments made under Impacts and Benefits Agreements (IBAs) are non-deductible;
• Clarifying that royalties payable by mine operators are deductible only if subject to the Mineral Rights Tax;
• Providing for exploration expenses to carried forward indefinitely to be deducted against income versus the current treatment of a five-year carry forward;
• And, providing for deductibility of certain expenses related to mine reclamation.

Amendments to the Mineral Rights Tax include:

• Strengthening the language respecting the application of the Mineral Rights Tax to net smelter returns royalties and similar payments;
• Providing relief from Mineral Rights Tax for the first $100,000 in royalty receipts, with that relief being phased out at $200,000 in royalty receipts; and,
• Providing deductibility for exploration expenses against royalty income.

Following is a description of some of the major features of the new tax regime.

Corporate Income Tax Credit

Currently, the act provides an unlimited corporate income tax credit against Mining Tax for the first 10 years in which the mine operates. Any Newfoundland and Labrador corporate income tax payable which relates to the mining operations may be deducted from the Mining Tax payable. This has been referred to as the tax holiday. The amendments will limit the credit to a maximum of $2 million per year for the same 10-year period. Some form of tax credit is important in maintaining a competitive mining tax regime and to encourage exploration and development. The limited credit should achieve this objective.

Processing Allowance

The Mining Tax is intended to be imposed upon the value of the mineral at the "pit�s mouth". However, since minerals are usually processed to some degree before sale, and the sales price reflects the value-added from processing, it is necessary to proxy the value at the "pit�s mouth". The processing allowance does this by providing a deduction by way of a return on capital for processing assets. The processing allowance can also be used to provide an incentive to process in the province.

The processing allowance is eight per cent of original cost of milling and concentrating assets, and 15 per cent for assets used for further processing. In addition, there is no current requirement that the processing assets be located in the province to avail of the processing allowance. Further, the act provides for a maximum allowance of 65 per cent of net income, and a minimum processing allowance of 15 per cent of the net income, regardless of the value of processing assets in place.

The amendments will restrict the processing allowance to assets in the province, providing an economic incentive for local processing. The minimum processing allowance of 15 per cent on net income is unnecessary and could have the effect of artificially inflating the deduction.

Eligible Deductions:

1. Impacts and Benefits Agreements (IBAs)
   The amendments will clarify that cash payments made under an IBA are not deductible.
   
2. Net Smelter Returns Royalties
   Currently, payments made to persons in the nature of royalties, such as a mineral production royalty, for the right to engage in mining operations are deductible. This is done on the presumption that these royalty payments are subject to the 20 per cent Mineral Rights Tax in the hands of the recipient. The act does not make this direct connection, however, and may leave room for differing interpretations. The amendments to this provision will ensure that only those royalty payments which are subject to the Mineral Rights Tax are deductible by the operator.
   
3. Exploration Expenses
   Currently, unused exploration expenses may be carried forward for up to five years from the date of expenditure. However, since exploration costs can be incurred over a period of years before mine development, and since the mine may take several years to turn a profit, the operator may lose the benefit of deducting this cost. The amendments would provide that the unused exploration costs could be carried forward indefinitely. This is consistent with other jurisdictions and would encourage additional exploration.
   
4. Mine Reclamation
   Under the Mining Act, a mine operator may set aside funds in a trust for mine reclamation expenses to be incurred in future years. Currently, these contributions are not deductible when deposited in a trust, only when spent on mine reclamation. It is proposed to permit deductibility at the time that the monies are deposited into the trust. The funds would be brought back into income when removed from the trust, and the actual expenditures on mine reclamation would remain deductible at that time. This provides for a more equitable matching of revenues and expenditures.

Net Smelter Returns Royalties and Other Royalties

The proposed Bill affirms government's policy intent to ensure that net smelter returns royalties and other non-Crown royalty payments are subject to the Mineral Rights Tax. Only those royalty payments taxed under this provision would be deductible by the operator.

Tax Free Amount of Net Smelter Returns Royalties

The amendments implement a tax-free threshold of $100,000 annually in royalty payments. It is also proposed that the tax-free threshold be phased out by the time that royalty payments reach $200,000 annually. This would help ensure that prospectors who discover minerals receive a reasonable return on the find if their rights are sold for royalties.

Exploration

As another incentive for exploration, the amendments provide deductibility for exploration expenses in calculating the Mineral Rights Tax.

2002 12 13                                        4:00 p.m.