Budget 2013, released on March 21, includes several notable mining-related measures, such as recharacterizing certain Canadian exploration expenses as Canadian development expenses and phasing out accelerated capital cost allowance. In the 2012 federal budget, corporate investment tax credits for pre-production mining expenses were phased out. Prior to that, incentives associated with the oil sands sectors were eliminated. Budget 2013 continues this trend of eliminating tax incentives in the non-renewable resource sector and aligning the tax treatments applicable to the mining and petroleum sectors. On the positive side, Budget 2013 extends the investment tax credit regime for flow-through shares in respect of certain mining expenses.
Pre-production Mining Expenses
Budget 2013 proposes to recharacterize certain intangible expenses incurred before the mine achieved commercial production. Prior to the proposed measures, such expenses would be characterized as "Canadian exploration expense" (CEE), which can essentially be deducted on a 100% basis. As a result of the proposed measures in Budget 2013, such expenses will now be characterized as "Canadian development expense" (CDE), which can essentially only be deducted on a 30% declining balance basis. The recharacterization from CEE to CDE will be phased in over several years by providing partial CEE and CDE treatment for such expenses starting in 2015, with full CDE treatment starting in 2018. Grandfathering is provided for eligible expenses incurred before 2017 in respect of projects already under construction or where there is an existing written agreement to incur the expense.
In addition to a less attractive deduction profile, the recharacterization of these expenses from CEE to CDE may affect the ability of issuers to raise capital using flow-through shares because the flow-through share market generally insists upon receiving CEE deductions.
As noted in Budget 2013, these proposed measures attempt to further align the mining and petroleum sectors because these types of pre-production expenses would generally be CDE for participants in the petroleum sector under the existing rules in the Income Tax Act (the Tax Act).
Phase-Out of Accelerated Capital Cost Allowance
Under existing rules, in the Tax Act, an accelerated capital cost allowance regime was available for certain mining facilities built to service a new mine as well as certain expansion projects for an existing mine. For eligible tangible property, the taxpayer was entitled to claim the base capital cost allowance (generally 25% on a declining balance, subject to the available-for-use rules), plus an amount equal to the income from the particular mine or mines for which the facility was built or expanded. Essentially this permitted the taxpayer to fully deduct these capital costs prior to being taxed on the income from the particular mine or mines. Similar to the way the accelerated capital cost allowance was previously eliminated for the oil sands sector, the proposed measures in Budget 2013 phase out the accelerated capital cost allowance regime over the next few years. The phase-out will begin in 2017, when only a portion of the additional capital cost allowance can be claimed, and will be completed by 2021, at which point no additional allowance will be provided. Grandfathering is available for eligible tangible property acquired before 2018 in respect of projects already under construction or where there is an existing written agreement to acquire the property.
Extension of Mineral Exploration Tax Credit
On a more positive note, Budget 2013 has provided yet another extension to the investment tax credit regime for flow-through shares in respect of certain grassroots mining expenses, commonly referred to as the "mineral exploration tax credit." As has been the case in prior years, the extension is limited to one year, thus only providing tax credits for qualifying flow-through share offerings through to the end of March 2014. It will be interesting to see if Finance will continue to extend this program in the future, given that the mineral exploration tax credit stands as one of the only remaining incentives applicable to the mining sector that is not available to the petroleum sector. In light of the continued alignment of the tax deductions in the mining and petroleum sectors made in Budget 2013 and other recent budgets, the junior mining sector may be somewhat concerned that this longstanding incentive scheme could be subject to scrutiny in the near future.
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