Details are provided on Ontario tax holiday

Mines in Ontario are subject to three separate levels of taxation: federal income tax, Ontario income tax and Ontario mining tax. The Ontario Mining Tax Act imposes a 20% tax on taxable mining profits as defined in that Act.

In his May 20 budget, Ontario Treasurer Robert Nixon proposed that the taxable mining profits earned from the first 36 months of production from a new mine in Ontario be exempted from Ontario mining tax.

The exemption is to be available for new mines that commence production after May 20 this year. For this purpose, new mines will include mines that have never been in production before, major expansions of existing mines and mines that are reopened after having been shut down.

It is understood that the definitions of qualifying new mines or qualifying major expansions will be based on the existing definitions in the regulations.

These existing definitions are:

New mine — a new mine project separate and distinct geologically and having no common workings with another mine during the immediately preceding five taxation years.

Major expansion — mine project involving an investment in an existing mine operation that increases the rate of ore production from the mining operation by at least 30% over the highest annual production for the expanded mine during the five taxation years immediately preceding the taxation year in which the first outlay pertaining to the investment was made.

Reopened mine — an inactive mine that has been closed down for a continuous period of five years prior to its reopening.

It is understood that a new mine project that now is in the preproduction phase and which commences production after May 20 will qualify for the exemption. In the case of the major expansion of an existing mine, apparently the question as to whether an expansion in process (but not completed) at May 20 will qualify, or only a major expansion where the first outlay pertaining to the investment is made after May 20, is still under review. Can claim depreciation

In calculating the exempt taxable mining profits, operators will be required to claim depreciation for mining and processing assets used in connection with the new mine or major expansion at the basic rates provided under the Act (but will not be required to deduct the accelerated allowance for depreciation on mining assets).

The basic depreciation rates are: * 30% per annum of the original capital cost for mining assets, and * 15% per annum of the original capital cost for processing assets.

However, it is understood that the operator will not be required to make the mandatory depreciation claims to the extent those claims would reduce the annual $500,000 exemption available to all operators.

In addition, operators will be required to deduct all non- discretionary expenses in the year such expenses are incurred. Present indications are that exploration expenses and preproduction development expenses will be permitted to be deferred and claimed after the exempt period ends.

In the case of a major expansion, it is the taxable profit of the expansion that is to qualify for the exemption and it will be necessary to allocate the taxable profit of the mine between the pre-expansion and expansion phases.

The budget proposals are not yet law, and enabling legislation is not yet available for review. It appears that a number of the details that will be dealt with in regulations are still under review. Mr Playfair is a tax partner with Clarkson Gordon, Toronto.