Taxing times

Canada’s mining industry is under siege again, this time by the federal government, which decided last year that mining and other resource sectors will not be eligible for a reduction in the basic federal tax rate of 7% (from 28% to 21%) when implemented in 2004. The tax change will apply only to certain sectors, namely technology and other new economy darlings. The mining industry sought the same favourable treatment, and Canada’s finance minister agreed to provide it — but only if and when two resource-specific tax incentives are scrapped.

After running the numbers though, the industry concluded that it would need a corporate tax rate of 13% to make up for the loss of the resource allowance and the accelerated capital cost allowance. Not suprisingly, the contentious issue was front and centre at the 58th annual mines ministers’ conference held recently in Quebec City, Que., with the Prospectors and Developers Association of Canada (PDAC) and the Mining Association of Canada (MAC) leading the lobbying charge.

A competitive tax regime is a serious matter for Canada’s mining industry, which is battling a severe market downturn and uncertainties related to land access and permitting timelines. It faces new challenges too, including the complexities of negotiating impact benefit agreements with native groups and various other stakeholders, and the increased risk of legal challenges from anti-development groups. Mining projects today must carry a far heavier load than they did in the past, which in turn makes them less attractive to investors. And it is no secret that investors are increasingly fed up with returns that barely surpass single-digit territory.

Attracting investment capital was a daunting proposition even before Ottawa’s multi-tier, corporate tax proposal was announced. It could become a case of Mission Impossible unless there is a stable, fair and competitive tax regime in place, not just in Ottawa, but in the provinces and terrritories as well. As MAC rightly points out, “in an era of globalization, where competition for capital is fierce, all industrial sectors must compete for the same limited pool of investment dollars.”

Paul Martin’s proposal is a step backward for an industry that only recently secured enhanced flow-through tax incentives to revive its ailing exploration sector. While there was an upward bump in exploration spending, particularly in provinces that topped up the incentives, it is nowhere near healthy and sustainable levels. As for mine development, Ottawa’s latest proposal puts at risk billions of dollars in new investment, including high-profile projects such as the Alberta oilsands and diamond mines still on the drawing board. Companies fear that trading the resource allowance and the provincial mining tax credit for an extension of the 21% corporate income tax rate would not preserve the net present value or internal rate of return of many mines under the existing tax system.

Given the sorry state of the industry, mining associations have no choice but to ask the government to extend the 21% federal corporate tax rate to the mining sector, and to preserve the current federal tax provisions provided to the sector in recognition of its high risk and capital intensity. As a first step, they hope to convince mines ministers, “individually and collectively,” to help with these lobbying efforts. Other voices are needed to ensure that politicians understand the potentially devastating consequences of the proposed corporate tax changes.

The mining industry has battled onerous policies many times during its turbulent history, and often prevailed by emphasizing its economic contribution to the nation, and to many rural communities. Times have changed. Mining’s economic contribution is less relevant to a predominantly urban society than it was when most city folks had close ties to their rural cousins. Today, yawns invariably greet the recitation of dry statistics showing that the minerals and metals industry is responsible for one out of every 13 export dollars entering the Canadian economy, or that Canada is first in potash and uranium production, second in nickel and gypsum, and third in titanium, zinc, asbestos, cadmium and platinum group metals.

Fortunately, both MAC and PDAC have broadened their message to encompass environmental and social values. The industry has re-affirmed its desire to be “part of the solution to the challenges confronting Canada’s aboriginal peoples.” It is striving to meet the challenges of orphaned and abandoned mine sites. It is championing new technologies that will reduce mining’s footprint on the land and a progressive approach toward labour relations. Despite all this progress, and its sizable contribution to national prosperity, the industry remains at the mercy of low metals prices and a deteiorating global economy. It cannot afford to sit back and allow its survival to be jeopardized by policies that undermine Canada’s business climate and internationally competitive tax system.

So far at least, the federal government appears to be getting the message, and has signalled its desire to find a mechanism to ensure tax fairness for non-renewable resource industries. The provinces are keeping up the pressure too, and optimism is growing that a solution will be found, and soon.