Editorial Tax Reform hurts base metal miners

These glory days for gold are overshadowing the importance of base metals to Canada’s mining industry to the point where the future of base metal mining in Canada is not at all clear. The last thing the industry needs is further “disincentives” for the base metal mining sector, yet that is likely one of the results of Finance Minister Michael Wilson’s white paper on tax reform.

The department of Energy Mines and Resources says that, on the basis of currently established ore reserves plus inferred extensions, production of copper, zinc and lead can be maintained at current levels to the mid-1990s. After that, however, output will start to decline unless new discoveries are made. And those new discoveries will have to be made soon, because it takes an average of six years for a discovery to become a mine.

But there has to be some incentive to go after base metals. Prices — the primary incentive — are buoyant now, but tax rules governing mining have to recognize the length of time before returns are seen, the competition of international markets and the risks involved in developing a mine.

Those incentives have been absent for several years. As a result, base-metal exploration expenditures fell by about 22% from 1977 to 1985 while precious metal exploration has increased almost twenty-fold.

The white paper strays even further from recognizing mining’s unique characteristics. Tony Munday, director of Canadian taxes at Inco Ltd., says this about the white paper’s effect on mining: “Within the confines of the industry, it becomes apparent that the project promising the smaller capital investment and the shorter lead time becomes the more attractive investment opportunity. As a result, factors, in addition to price, may influence a further swing from base metals to gold and other precious metals.”

In general, the industry breathed a sigh of relief when the white paper was first released. Things could have been worse. Still, the industry as a whole was a loser with the average tax rate for a profitable mining company rising by about 11%.

But specific proposals could help swing the industry away from the large, capital-intensive base metal operations.

For example, the rate at which capital costs can be deducted for resource extraction assets has been reduced by almost 17%. The result is that it will take longer for companies to amortize the total cost of those assets.

Capital cost allowances will also only be claimable when the asset is put in use as opposed to when the asset is acquired or is under construction. The economic reality, however, is that assets are often available for use but are not actually in use. But that shouldn’t mean they can’t be deducted as a capital cost.

Munday uses the example of non-ferrous smelters having to spend millions of dollars in order to meet increasingly strict environmental standards. Yet, because of the lower capital cost allowance rates and the put-in-use rule, the companies involved will not be able to amortize those costs immediately. The result will be a significant increase in the cost of doing business.

The Mining Association of Canada has opposed the put-in- use rule suggesting that it not be adopted or, if it is adopted, it should be restricted to one year. That is, if the asset isn’t put to use after one year, it could be amortized after that.

There are many changes that could be made to the white paper, a document that we fundamentally support. The Mining Association’s suggestion is one we hope the finance minister takes a long, hard look at.