Energy, Mines, and Resources

Subsection 102(5)(b) – Actual & Proper Working Expenses

Quartz Mining Act, Section 102 – Annual Royalty
Interpretation Bulletin: Subsection 102(5)(b) – Actual & Proper Working Expenses
January 26, 2007

Reference
Subsection 102(5) specifies the deductions and allowances to be made from the revenue of the mine to determine the mine’s profit for royalty calculations. Specifically, paragraph (b) allows a deduction for:

the actual and proper working expenses of the mine both underground and above-ground, including salaries and wages of necessary superintendents, supervisors, laborers and employees of all sorts employed at or about the mine, together with the actual and proper salaries and office expenses for necessary office work done at the mine and in immediate connection with the operation of the mine;

Interpretation Points

1. All direct working expenses are eligible

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

  • salaries of labour, technical, supervisory, support personnel;
  • salaries and office expenses associated with the operation of the mine;
  • costs of repairs or maintenance of the capital assets of the mine; and
  • operating costs for housing or camp facilities for employees at the minesite. 

2. Reclamation fund contributions are not deductible

Contributions to a reclamation fund do not qualify as a deduction for the purposes of royalty calculations under the category “actual & proper working expense”.

A contribution to a reclamation fund for future expenditures does not qualify as funds actually spent. Also, reclamation fund contributions under this category do not constitute a “working expense” of the mine, in that they are destined for reclamation after the mine has been worked. 

3. The costs of reclamation are deductible in the year

The costs of reclamation activities carried out as part of a progressive reclamation plan are a working expense of the mine, and therefore eligible for deduction in the year. This is consistent with the treatment of development expenses; the costs are deductible in the year the work is done, but not eligible for carry-forward or carry-back.

4. Office expenses incurred away from the site of the mine may be deductible.

Office work done in immediate connection with the working of the mine can occur away from the site of the mine, and can reasonably be deductible for the purposes of calculating the royalty.

Office expenses eligible as deductions are those that are strictly related to keeping the mine in a state of being active and functioning. For example, expenses related to the accounting or purchasing on behalf a mine’s operation are appropriate expenses to be considered, regardless of whether the work required to undertake these tasks occurs at the mine site itself or at an office located away from the actual mine. 

5. Interest and carrying charges on debt are not an eligible deduction.  

Interest and carrying charges are not inherent to a mine. They result from project financing. The royalty does not consider such financial aspects of corporate structure.

6. Certain costs of leased assets may not be eligible for deduction under this provision.  

Not all of the costs of leasing equipment or assets are necessarily considered to be working expenses of a mine. Certain leases, especially where equipment or other assets are leased on a long term basis, may be considered capital leases, and parts of the subject lease costs related to capital cost of the assets or financing may not be eligible for inclusion as working expenses of the mine. Parts of the lease cost related to capital cost of the assets should be considered for inclusion in the capital cost base for depreciation allowance. Reference should be made to the (Canada) Income Tax Act for guidance on treatment of costs for long term, or capital, leases of equipment or other assets. (See Interpretation Bulletin: Subsection 102(5)(h) – Depreciation)

7. Third party royalties are not an eligible deduction.

Third party royalties are not actual and proper working expenses of a mine, and are thus not eligible for deduction under this provision of the royalty. Such royalties are usually related to property acquisition, which costs are not an eligible deduction in calculating the royalty.