Cassels Brock Federal Budget Brief 2013

Published: 03/21/2013

The following is a summary of certain fundamental tax measures contained in the Canadian federal government's budget released on March 21, 2013.

MINING AND ENERGY SECTOR Budget 2013 contains several proposals relevant to the mining and energy sectors, some of which will be welcome by certain taxpayers while other changes may have adverse implications to taxpayers incurring pre-production expenses and making investments in new mines and mine expansion. Flow-Through Shares: Extension of the Mineral Exploration Tax Credit ("METC") Flow-through shares provide a major source of new capital to junior mining companies. These shares are attractive to investors for various reasons, including (i) the ability to deduct at the investor-level certain exploration expenses incurred by the issuing corporation; and (ii) the ability in certain circumstances to claim a special 15% METC in respect of the investment in the share. The existing METC is scheduled to expire on March 31, 2013; however, consistent with the past several federal budgets, Budget 2013 proposes to extend the 15% METC for an additional year, until March 31, 2014. Otherwise, flow-through shares are unaffected by Budget 2013. Expansion of Accelerated Capital Cost Allowance ("CCA") for Clean Energy Several proposals have been introduced by the Department of Finance ("Finance") over the past few years to provide a tax incentive for investment in clean energy generation equipment, including wind and solar equipment. These incentives are in the form of rapid deductions for CCA in respect of the cost of the equipment (50% deduction on a declining balance basis). Budget 2013 proposes to expand the existing category of eligible assets to include certain biomass production equipment and associated cleaning and upgrading equipment. Phase-out of Accelerated CCA for Certain Mining Expenses Budget 2013 proposes to phase-out certain preferential CCA deduction rates in respect of the cost of capital assets (i.e., machinery, equipment and structures) used in new mines and major mine expansions. Natural resource companies, including mining and oil and gas companies, are currently entitled to claim capital cost allowance deductions in respect of most capital assets at a 25% declining-balance basis. Mining companies are entitled to an additional accelerated CCA in respect of capital assets used in new mines or certain mine expansions. Budget 2013 proposes to phase-out this accelerated CCA over the 2017-2020 taxation years, which in the view of Finance will better align the tax regimes of the mining sector with those applicable to other natural resource sectors (i.e., oil and gas). Both this measure and the proposed phase-out of preferential deductions for pre-production expenses (discussed below) will apply to expenses incurred on or after March 21, 2013, subject to certain exceptions. Accordingly, taxpayers in the mining sector should closely review the types of expenses that will be subject to this phasing out and determine whether any such expenses may qualify for certain limited grandfathering. Phase-out of Preferential Deductions for Pre-Production Mine Development Budget 2013 proposes to phase-out preferential deduction rates in respect of pre-production mine development expenses (i.e., intangible expenses for removing overburden or sinking a mine shaft) that are incurred for the purpose of bringing a new mine for a mineral resource located in Canada into production. Such expenses are currently treated as Canadian exploration expense ("CEE") and may be deducted in full in the year incurred or carried forward indefinitely for use in future years. This is to be contrasted with similar expenses incurred after a mine comes into production, which are treated as Canadian development expense ("CDE") and are deductible at a much less favourable rate of 30% per year on a declining-balance basis. Budget 2013 proposes to recharacterize such expenses as CDE instead of CEE (phased-in over the 2014 to 2017 taxation years), resulting in the loss of the favourable 100% deduction in the year the expenses are incurred and a migration over to the less-favourable 30% deduction regime. As with the phase-out of preferential depreciation rates for certain mining expenses (discussed above), Finance considers this measure as better aligning the tax treatment available across the natural resources sector. BUSINESS TAX MEASURES Synthetic Dispositions

A synthetic disposition is an arrangement under which a taxpayer economically disposes of a property but retains ownership of the property. The arrangement may be designed to alienate property without triggering the income tax consequences that would result from a disposition.

In a somewhat unexpected move, Budget 2013 proposes that agreements and arrangements entered into by a taxpayer that have the effect of eliminating all or substantially all of the taxpayer's risk or loss and opportunity for gain or profit in respect of the property for a period of more than one year, will give rise to a deemed disposition of the property by the taxpayer at fair market value and a deemed reacquisition of the property at that same amount. Despite the deemed reacquisition of the property, the taxpayer would not be regarded as being the owner of the property for certain holding period...