2012 Federal Budget to Reduce Mining ITCs

Much of the economic potential of Canada's North lies beneath the ground, in the form of vast natural resources. Discovering and developing these resources in some of the world's most challenging terrain is a daunting undertaking, requiring considerable investment of time, capital and expertise. Exploring for and developing natural resources is a risky activity where success often occurs (if at all) after many failures, and the costs involved (especially in Canada's North) make financing this high-risk activity very difficult.

For many years the income tax system has provided a valuable incentive to Canadian mining companies engaged in what is commonly referred to as "pre-production mining" activities. Qualifying expenditures made by a company on these activities entitle it to an "investment tax credit" or "ITC", which is very valuable because each dollar of ITC reduces the amount of the company's income tax payable by $1. Thus, unlike an expenditure that is simply deductible in computing income (where $1 of expense saves perhaps 25 or 30 cents of tax, depending on the company's applicable tax rate), ITCs reduce taxes owing dollar for dollar.

The pre-production mining expenditure ITC applies to qualifying expenditures made in Canada by a taxable Canadian corporation on activities relating to "qualifying minerals," which are:

Diamonds; Base or precious metal deposits; and Industrial minerals that (when refined) result in a base or precious metal. Qualifying expenditures are those included in the taxpayer's pool of Canadian exploration expenses by virtue of being incurred (before the mine is producing in reasonable commercial quantities) on:

"Grass roots" exploration to determine the existence, location, extent or quality of a mineral deposit in Canada (exploration expenses); or Activities undertaken in order to bring a new mine in Canada into production (development expenses). Expenditures on these activities ("pre-production expenses") are added to a pool, and the corporation is entitled to claim an ITC equal to 10 percent of the pool balance for the year.

Unfortunately, in the March 29, 2012 Budget, the federal government announced the elimination of the pre-production mining expenditure ITC. For preproduction exploration expenditures, the ITC will continue to apply at the 10 percent rate for expenditures incurred in 2012, with the ITC rate dropping to 5 percent for expenditures incurred in 2013 and no ITC for expenditures in subsequent...