François Paradis, Hugo-Pierre Gagnon
May 9, 2013
On May 6, 2013, the Québec government revealed its long-awaited mining royalty and tax regime in an official document titled “A New Mining Tax Regime: Fair for All,” available here.
In an Update on March 13, 2013, Osler reported on the proposed mining royalty and tax regime announced in the Québec government’s initial consultation paper. As reported at that time, a hybrid royalty scheme was proposed, consisting of a 5% royalty based on the value of the extracted minerals (i.e., ad valorem) and an additional tax on profits that could be calculated on the profit margin of a mine, based either (i) on a rate increasing in lock step with the mine’s profitability (i.e., progressive taxation) or (ii) on the taxation of “super-profits,” based on a 30% fixed rate.
Following a consultation process, which revealed continued criticism and a lack of consensus, the Québec government managed expectations in the weeks preceding its May 6, 2013 announcement by saying that the new regime would be the result of a “compromise” between the various stakeholders that have competing interests. Ultimately, the regime it has introduced does implement significantly higher royalty payments than the present regime, although clearly less than initially proposed.
The New Regime
As contemplated in the consultation paper, the new regime will consist of a hybrid royalty scheme featuring a minimum mining tax based on the value of the extracted minerals and a progressive mining tax calculated on a mine’s profits. Mining companies will pay either the minimum mining tax or the progressive tax on mining profits, whichever is greater.
With respect to the minimum mining tax, all mining companies extracting minerals in Québec will have to pay a royalty for each mine at a fixed rate of 1% of the total output value at the mine shaft head below or equal to $80 million, calculated on an annual basis, but increasing to 4% for each dollar in excess of the $80 million threshold. The output value at the mine shaft head is based on the gross value of annual output of the mine, less (i) expenses incurred for the activities of crushing, grinding, sieving, processing, handling, transportation and storage of the mineral substance from the mine, including marketing activities; (ii) general and administrative expenses that relate to such activities; (iii) a depreciation allowance for property used in mining operation activities from the first accumulation site of the mineral substance after it is removed from the mine; and (iv) a processing allowance.
As for the tax on mining profits, the Québec government chose to implement a progressive taxation scheme having the same tax base as that under the current regime, whereby the tax rate will be calculated on the profit margin of a mine, on the basis of a rate increasing with that mine’s profitability. The effective rate of this tax on mining profits will start at the existing 16% rate for mining companies with a profit margin of 35% or less, but rising to 17.8% for mining companies with a profit margin from 35% to 50%, and reaching as high as 22.9% for mining companies with a profit margin of more than 50%. The profit margin will be calculated on the operator’s mining profit divided by the total of the gross value of annual output for all the mines it operates. Therefore, the higher a mining corporation’s profit margin, the higher the mining tax.
The minimum mining tax paid by all mining companies may be carried forward and applied against the tax on future mining profits as a non-refundable minimum mining tax credit, thereby reducing the fiscal burden for mining companies. However, the use of amounts carried forward will be limited each year so that companies always pay an amount of mining tax on profit equivalent to the minimum mining tax calculated for that fiscal year.
The Québec government estimates that the total revenues generated by this new royalty scheme will amount to $370 million in mining royalties in 2015, and between $770 million and $1.8 billion over the next 12 years, which would represent an increase of approximately 15% to 30% over the royalties from the old regime. That being said, the new mining royalty rates are lower than those initially proposed by the Québec government in its election platform and in its consultation paper.
Reform of the Québec Mining Act
The Québec government also announced that the Mining Act (Québec) will be amended to ensure better environmental protection and greater transparency with respect to mining operations.
For instance, the financial guarantee provided by mining companies would be increased to 100%, from 70%, of the mine restoration costs, and the issuance of a mining lease will be subject to the company’s obtaining prior environmental authorizations in compliance with the procedures of the Environment Quality Act (Québec). The government also proposes to establish a disclosure framework whereby each mining company would be required to disclose how much it pays in mining tax and royalties as well as information regarding the amount of mineral extracted.
The press reported that a bill to make this amendment would be tabled at the National Assembly by the end of the current session, but would not be adopted before fall 2013 at the earliest.
Incentives to Promote Local Transformation in Québec
The Québec government will also implement measures to promote mineral resource development and processing of ore by (i) bolstering incentives to process ore in Québec and (ii) providing direct support to investment in processing by focusing on financing and electricity rates.
The Québec government will increase the processing allowance (i) by 3% when a mining company engages solely in concentration operations (including smelting activities and gold and silver refining) (i.e., to 10%, from 7%); and (ii) by 7% when a mining company engages in processing operations in Québec (smelting, refining, the production of metal powder and billets) (i.e., to 20%, from 13%). The maximum processing allowance will also be increased to 75%, from 55%, of the annual profit of each mine. This processing allowance will reduce mining profits for tax purposes by granting a return on processing ore in Québec. These measures are in addition to two previously existing measures: (i) a 10-year tax holiday for large investment projects; and (ii) an investment tax credit on manufacturing and processing equipment.
Other measures are being considered by the Québec government to promote local transformation of ore in Québec, such as (i) acquiring interests in mineral processing projects in Québec through the Capital Mines Hydrocarbures fund, which was established to promote more extensive processing of Québec’s resources; and (ii) granting blocks of electricity at a preferential rate for certain mining projects.
Following several studies, debates and consultations, the government has now formally introduced a higher royalty regime for mining companies operating in Québec, which are subject to a minimum royalty payment. The government states that it is confident that it has struck the right balance among the interests of the various stakeholders and feels that it has proposed a royalty regime that is fair to all; however, it is clear that not all market participants are convinced. This new mining royalty and tax regime is expected to come into force at the beginning of 2014.
Of interest is that on May 7, 2013, the day after the announcement of its new mining tax regime, the Québec government renewed its commitment to Northern Québec development by unveiling a plan of future investment in Québec territory north of the 50th parallel between 2013 and 2018, totalling $870 million by the “Fonds du développement nordique” to finance public infrastructure.
If you have any questions or would like to discuss this Update, please do not hesitate to contact Ward Sellers, François Paradis or Hugo-Pierre Gagnon.
Authored by Ward Sellers, François Paradis, Hugo-Pierre Gagnon