Energy, Mines, and Resources

Determination of Deductions

 

Determination of Deductions

The Quartz Mining Act  578 KB specifies those costs that are eligible for deduction from revenues to determine net profits upon which the royalty is calculated (Ref: 102(5)). These include:

  • transportation of product to the point of sale;
  • actual and proper working expenses of the mine;
  • cost of supplying light, power and transportation used in the mining operation;
  • cost of food and provisions for employees;
  • cost of supplies consumed in the mining operations;
  • cost of securing the mine and mineral product;
  • cost of insurance of product, mining plant and equipment;
  • depreciation allowance for plant, machinery, equipment and buildings;
  • cost of development works in the year, at the minesite and elsewhere in the Yukon; and
  • taxes payable on the profit of the mine.

The following guidance applies generally to all the deductions to be used in calculating the royalty.

  • The basis of the royalty is the pit mouth value of mine output, thus unless specifically otherwise included (i.e., transportation of output Ref: 102(5)(a)), costs incurred downstream of the mine are excluded.
  • Corporate costs not directly related to the operation of the mine are excluded. Examples of this type of cost so excluded are general corporate costs, payments made to a community, agency or corporation that are not directly required for the carrying out of operations, costs for informational or promotional purposes not involving the direct performance of operations, etc..
  • The amount of each deduction used in calculating the royalty shall not exceed an amount that is commercially reasonable. Where an amount for inclusion in deductions or revenues is based on a transaction not made at arm’s length, the basis for the amount to be included in the royalty calculation shall be what would be commercially reasonable between parties dealing at arm’s length.
  • A specific amount (be it a revenue or an expenditure item) cannot increase or decrease the royalty payable more than once. Further, a specific amount that increased or decreased a previous year’s royalty cannot similarly increase or decrease a subsequent year’s royalty.
  • Costs included in deductions for the calculation of royalty shall be net of all refunds, cost recoveries, subsidies and credits, including tax credits. Where the sum of refunds, cost recoveries, subsidies and credits exceeds the original amount paid or received, the excess shall be added to revenues.

The following notes expand on some specific aspects of eligible deductions. Note that the discussion that follows does not cover all parts of the QMA related to allowances and deductions; some specific parts are considered clear enough in the QMA so as to not require additional explanation or guidance in this narrative.

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9.1 Transportation of Product to the Point of Sale

Transportation costs for product to the point of sale may be considered in either of two ways, as follows:

  • product transportation charges for movement of mine output to the point of sale or the point of treatment, the costs of which are included as part of post-sales charges, are included with treatment charges as a reduction to gross proceeds (See 8.2 Valuation of Mine Output at the Pit Mouth – Treatment Charges, Ref: 102(4)); or
  • product transportation costs for movement of mine output to the point of sale, paid directly by the mine operator or owner, are eligible for deduction (Ref: 102(5)(a)).

The difference between a cost treated as a reduction in revenues, vs. eligible for deduction, is effectively whether the mine owner or operator paid the cost directly. If the cost is part of post-sales charges, it is used to reduce revenues. If the cost is paid directly by the mine operator, it is eligible as a deduction (Ref: 102(5)(a)). In either event, the net result is the same, in that product transportation costs to the point of sale or treatment are deductible.

For greater certainty, the deduction of a cost of transportation of product sold excludes any transportation charges included as a reduction to gross proceeds. 

In addition, transportation costs incurred within the mine operations, for product, materials and personnel are deductible separately (See 9.3 Light, Power and Transportation, Ref: 102(5)(c)).

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9.2 Working Expenses of the Mine

All direct working expenses associated with both an underground and surface mine are eligible for deduction, including:

  • salaries of labour, technical, supervisory, support personnel;
  • salaries and office expenses associated with the operation of the mine; and
  • costs of repairs or maintenance of the capital assets of the mine. 

(Ref: 102(5)(b)) (See: Interpretation Bulletin – Subsection 102(5)(b) – Actual & Proper Working Expenses)

In the case of leased equipment or assets, it is noted that not all of the costs of leasing such equipment or assets are necessarily considered to be working expenses of a mine. Certain leases, generally where equipment or other assets are leased on a long term basis, may be considered capital leases, and parts of the subject lease costs may not be eligible for inclusion as working expenses of the mine, but may be considered for inclusion in the capital cost base for depreciation allowance in 102(5)(h). (See 9.5 – Depreciation Allowance)

The operating costs for housing or camp facilities for employees at the minesite are eligible for deduction as actual and proper working expenses of the mine (Ref: 102(5)(b)). The costs of providing housing or camp facilities for employees are not included in this provision, however, the capital costs for housing or camp facilities at the minesite may be included in the capital asset pool for inclusion in the allowance for depreciation of buildings (Ref: 102(5)(h)).

Private royalties to third parties are not eligible for deduction.

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9.3 Light, Power and Transportation

The operating costs of supplying light, power and transportation (of product, materials and personnel) used in the mining operation or in handling ore or mineral are eligible for deduction (Ref: 102(5)(c)). Capital costs for such services are not eligible for deduction, excepting as allowed under 105(5)(h).

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9.4 Food and Provisions for Employees

Where the mine provides meals and provisions for employees that are consumed or used on site, such costs are eligible for deduction, on the assumption that any cost for such food or provisions provided by the mine for employees are considered within the respective salaries and wages. (Ref: 102(5)(d)) (See: Interpretation Bulletin – Subsection 102(5)(d) – Food and Provisions).

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9.5 Depreciation Allowance

Depreciation allowance is an eligible deduction. It is limited to the lesser of the annual cost of maintenance, repairs and renewals necessary to maintain plant, machinery, equipment and buildings in efficient working condition, and 15% of the incoming capital value of the assets in use for the year. (Ref: 102(5)(h)). 

The actual expenses incurred in maintaining, repairing and renewing capital assets in efficient working condition must be tracked and reported. While these costs are deductible as part of the “proper working expenses of the mine” (See: 9.2 Working Expenses of the Mine), they also provide a partial basis for determining the depreciation allowance. For greater certainty, the actual maintenance, repair and renewal costs are not deductible twice – both as working expenses and as depreciation allowance. They are deductible as working expenses, and also provide a partial basis for determining the depreciation allowance (limited by the 15% of incoming capital value in the year). It is, however, the calculated depreciation allowance that is deductible in the second instance, not the actual maintenance and renewal costs. 

As noted above, the capital cost of housing and camp facilities at the minesite can be included in the pool of capital assets for this depreciation allowance. 

The original capital cost of capital assets is the original cost of acquisition or construction. It does not include incremental costs for component replacement. It does include incremental costs of new components that extend the functionality of the asset. (See: Interpretation Bulletin – Subsection 102(5)(h) – Depreciation). 

The value of the asset base for calculating the depreciation allowance excludes the capital costs of any assets which have been disposed, mothballed or otherwise removed from active contribution to the operations. 

The incoming capital value of the assets in use for the year is the original cost of acquisition or construction of the assets in use, less the cumulative depreciation allowance that has been claimed in previous years.

The maximum cumulative depreciation allowance that may be claimed over time is limited to the original capital cost of the assets.

Exploration and development expenditures do not qualify for depreciation allowance.  Such expenses are considered under 102(5)(i). (See 9.6 – Exploration and Development Expense Deductibility).

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9.6 Exploration and Development Expense Deductibility

The cost of exploration and development expenditures as outlined in 102(5)(i) are deductible in the calendar year in which they are incurred. Exploration and pre-development work in prior years are not allowed to be carried forward to future years. (Ref: 102(5)(i)) (See: Interpretation Bulletin – Subsection 102(5)(i) – Exploration and Pre-development Expenses).

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9.7 Income Tax Deductibility

Corporate Income Taxes Are Deductible
Taxes eligible for deduction as “on the profit of the mine” include corporate income taxes payable to the Yukon Government and to the Federal Government. Where corporate income tax is required to be paid to a Yukon First nation, such tax is also deductible. (Ref: 102(5)(j)) (See: Interpretation Bulletin – Subsection 102(5)(j) – Corporate Income Taxes).

Deductibility of Income Tax Is Limited to Yukon Mining Income
The income tax deductibility is limited to taxes on a company’s mining operations in the Yukon. When a company has commercial activities other than mining in the Yukon or commercial activity, including mining, in other provinces, the income tax deduction is limited to that portion of corporate taxes derived from the company’s mining operations in the Yukon, and a calculation of the imputed taxes applicable to the Yukon mining operations is required.

Managing the Circular Deductibility of Income Tax and Royalty
The deductibility of income taxes against income for royalty and of royalty against income for income taxes creates a circular function. There is need to resolve this circularity to a satisfactory precision of calculation, as follows: 

  • the starting point for calculation of both royalty and income tax should be a ‘good faith’ estimate for each as deductions in the other;
  • then, the royalty and tax calculations should be iterated a sufficient number of times, incorporating in each successive iteration updated royalty and income tax amounts as produced in the preceding calculation; and
  • there should be sufficient iterations to bring the incremental difference in royalty between iterations to less than 0.1%. 

Amending a Royalty Return for Actual Income Tax
The deductibility of income taxes against income for royalty, and of royalty against income for income taxes, may require some adjustment of royalty and/or tax returns because the respective reporting periods may not be aligned. 

The royalty return for a (calendar) year is due at April 1st (following year), and the respective royalty payment is due October 1st. The comparable federal income tax return would not be due until June 30th, assuming filing on a calendar year basis. Thus, income taxes may not be known in time for the preparation of the royalty return. 

Further, corporate income tax is based on the company’s fiscal year, which may differ from a calendar year. If so, this may require additional, reporting period-related adjustment. 

The royalty return should be based on a ‘good faith’ estimate for income tax, calculated as above, and amended before payment in October, incorporating actual income tax as filed. 

It is further recognized that final resolution of corporate income taxes for any year can be delayed pending assessments, audit, and reassessment. As a result it may be several years before the actual income tax for a specific year is finally resolved. The royalty return should be further amended when “final” actual income tax of the year is determined. 

While it is recognized that income tax for a year can be changed as a result of loss carry-over (backward or forward) provisions, such carry-over relates to the income tax calculation of the tax year for which the loss was incurred. The income tax deductibility for QMA royalty relates to the income tax of the same period as that for the royalty, thus the royalty for a specific year is not subject to amendment on the basis of a carry-over impact of income tax from another year. 

If amendment of a royalty return subsequent to the payment date results in an increase to the royalty owing, such shall be immediately due for payment, and interest at the chartered bank administered prime business rate quoted monthly by the Bank of Canada (series V122495) shall be owing from the original payment due date for that royalty. If an amendment of a royalty return subsequent to the payment date results in a decrease to the royalty owing, the overpayment will be credited to the company’s royalty account. (See: Interpretation Bulletin on Amending a Royalty Return).

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