Harmonization Crunch for Miners
The recent Ontario budget provided a reminder that harmonization is fast approaching and that the CRA will commence to administer Ontario's corporate income tax and capital tax, corporate minimum tax, and certain other taxes for taxation years ending after 2008. Harmonization may bring an unexpected burden for Ontario mining companies.
Under the Ontario-federal 2006 harmonization agreement, a corporation must determine its federal and Ontario tax attributes at the end of 2008 to establish whether a transitional debit or credit to Ontario taxes, payable over the reference period, arises when the Ontario pools are reset to the federal balances for the first taxation year ending after 2008. For a calendar-yearend company, the reference period starts on January 1, 2009 and ends five years later on December 31, 2013. For most mining companies, the tax attributes generally consist of UCC balances for fixed assets, eligible capital expenditures, paragraph 20(1)(e) deductions, resource pools for CCEE and CCDE, and losses (the tax balances).
The flip side, a transitional debt, is bad news for junior mining companies: additional Ontario taxes payable equal the excess of federal tax balances over the Ontario tax balances, multiplied by 14 percent and the Ontario allocation. Assume that a mining company (Mineco) with a calendar yearendowns mining properties and carries on operations exclusively in Ontario; its federal tax balances are $1,000,000 more than its Ontario tax pools at December 31, 2008. Harmonization requires that Mineco pay
additional Ontario taxes of $140,000 for the extra $1,000,000 of tax attributes it will receive through the harmonization process. The Ontario allocation is redetermined every year over the five-year reference period; if Mineco continues to operate exclusively in Ontario in each of the next five
years, the additional $140,000 of Ontario tax is payable pro rata over five years. Junior and mid-sized mining companies are generally never taxable until production, and even then they are not taxable for many years because of accelerated tax writeoffs provided on mining facilities constructed for a
new mine or a major expansion of an existing mine. A junior resource company in an exploration and development phase has little use for additional tax deductions: its key concern is raising cash to finance such activities. In fact, a junior resource company typically raises financing by issuing flowthrough shares, and renouncing tax deductions in favour of funds from flowthrough share investors.
Junior mining companies might consider emulating the lobbying efforts of other sectors for special relief to further defer transitional tax; SR & ED claimants have been partially successful in this quest. A preferable
approach for junior mining companies would be a rule requiring the payment of additional Ontario taxes only if the additional deductions are actually used; actual deductions could be tracked easily in a separate tax pool and the additional taxes payable made equal to 14 percent of deductions
claimed in a year. A main reason for the disparity between Ontario and federal tax pools that creates a transitional debit is the "negative resource allowance," which results in income to a taxpayer that has a resource loss. The federal resource allowance was completely phased out by 2006 in favour of lower tax rates. Ontario retained the 25 percent resource allowance (or loss) rules.
The recent Ontario budget also has good news for a corporation engaged primarily in mining or manufacturing: Ontario capital tax is eliminated (retroactively) as of January 1, 2007, one year earlier than previously scheduled. Ontario retains its 2 percent corporate tax rate reduction, which reduces tax from 14 to 12 percent on M & P profits earned in Ontario, including Ontario mining profits.
John Jakolev and Graham Turner
Jet Capital Services Limited, Toronto
