Energy, Mines, and Resources

Subsection 102(5)(h) – Depreciation

Quartz Mining Act, Section 102 – Annual Royalty
Interpretation Bulletin: Subsection 102(5)(h) – Depreciation
January 26, 2007

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

a sum for annual depreciation, by ordinary wear and tear, of the plant, machinery, equipment and buildings, the sum to be based on the probable annual average cost of repairs and renewals necessary to maintain them in a condition of efficiency, and in no case to exceed for any year fifteen per cent of the value at the commencement of the year, the value to be appraised by an officer to be named by the Minister.

Interpretation Points

1. The annual depreciation allowance shall be determined as:

  • the lesser of:
    • the annual cost of maintenance, repairs and renewals necessary to maintain the mine plant, machinery, equipment and buildings in efficient working condition; and
    • 15% of the value of the assets at the beginning of the year; 
  • to a cumulative maximum claim of 100% of the original capital cost of the assets. 

The actual expenses incurred in maintaining, repairing and renewing capital assets in efficient working condition must be tracked and reported. It is noted that while these costs are deductible as part of the ‘proper working expenses of the mine’ (See: Interpretation Bulletin: 102(5)(b) – Actual & Proper Working Expenses), 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. 

The incoming capital value of the assets in use for the year at the beginning of 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 original capital cost of capital assets is the original cost of acquisition or construction. It does not include incremental costs for component replacement, unless the original capital cost of the replaced component is removed from the base. It does include incremental costs of new components that extend the functionality of the asset.

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

Assets which have formed part of the capital asset cost base in the past, but which are not in use during the royalty period by reason of being disposed or mothballed or otherwise removed from active contribution to the operations are to be excluded from the asset base in calculating the depreciation allowance. 

2. The minimum capital cost of an asset for inclusion in the value of capital assets for depreciation is $10,000, unless otherwise agreed.

3. Exploration and pre-production expenditures are not allowed as a deduction for depreciation in the calculation of royalties. Such expenses are considered under 102(5)(i).