Energy, Mines, and Resources

Subsection 102(5)(j) – Corporate Income Taxes

Quartz Mining Act, Section 102 – Annual Royalty
Interpretation Bulletin: Subsection 102(5)(j) – Corporate Income Taxes
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, item (j) allows a deduction for:

all taxes payable or paid on the profits of the mine or mining work or on the profits made in smelting, refining, or otherwise treating any of the products of the mine or mineral work.

 Interpretation Points

1. Yukon, federal & First Nation corporate income taxes are deductible.

Taxes payable or paid, for deduction in calculating the royalty, 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.

2. Income tax for deductibility is limited to that from mining operations in the Yukon.

The deduction for taxes is intended to be a deduction in respect of the income tax payable on the profits of the mine, or mines, in the Yukon. Actual corporate income taxes could include additional revenue and/or deduction streams from activities other than mining and/or commercial activity in other jurisdictions. These incremental revenue and deduction streams must be eliminated from income tax for the royalty calculation.

When a company has activities other than mining in the Yukon, including other 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

3. The income tax deductible in calculating royalty shall be net of tax credits derived from expenditures that are included in deductions for the royalty.

It is a general requirement that all costs included in deductions for the calculation of royalty are to be net of all refunds, cost recoveries, subsidies and credits, including tax credits. It is recognized that tax credits might not be claimed or used immediately, and may be effectively received (or used) in a tax year following the year in which the original expenditure was deducted in calculating royalty. 

The tax credits derived from mine expenditures should be recognized in the royalty calculation when the benefit is received or used. That is, the income tax deductible in calculating royalty should be taken after, or net of, tax credits derived from expenditures that are included in deductions for the royalty.

4. 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; 
  • sufficient iterations should occur to bring the incremental difference in royalty between iterations to less than 0.1%. 

5. The calculation of royalty shall be updated if the income tax payable or paid is changed.

In the event that an income tax amount as used in the calculation of royalty is changed due to subsequent assessment or audit of the income tax, the royalty return shall be amended and payment made of any additional royalty that may be due.

The income tax deduction used in the royalty calculation is specific to the same calendar year. It is recognized that final resolution of corporate income taxes for any year can be delayed pending assessments, audit, and reassessment.   

Similarly, royalty returns will be subject to annual assessment, review and audit. Changes to the royalty as a result of assessment, review or audit may also impact corporate income taxes, and could result in further adjustment to the royalty owing, due to the circularity of the calculation.

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. 

The royalty return, as filed, will remain open for amendment related to changes in the corporate income tax. If amendment of a royalty return subsequent to the payment date results in an increase to the royalty owing, the additional royalty owing shall be immediately due for payment, together with interest at the chartered bank administered prime business rate quoted monthly by the Bank of Canada (series V122495) from the due date of the original royalty payment for the subject year. 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.