Energy, Mines, and Resources

Royalties

Royalty regulations are currently under development. Recent amendments to the QMA have capped the royalty at 12% based on a net profit calculation. These amendments plus the new regulations are anticipated to become effective in the fall, 2009.

This Royalty Narrative is intended to provide guidance on interpreting the royalty provisions of the Quartz Mining Act  579 KB. The narrative has no legal status. For the specifics of the royalty requirements, refer to the Quartz Mining Act  579 KB.

Table of Contents:

Scope

Mining in the Yukon is administered under the Quartz Mining Act (QMA)  579 KB (S.Y.2003, C.14), enacted by the Yukon government in 2003. Section 102 of the QMA specifies an annual royalty payable to the Yukon Commissioner on mining profits. This narrative provides a summary description of the QMA royalty regime, an outline of the basis for calculation of royalty, and supplementary context to Interpretation Bulletins as may be issued by the Yukon government.

This narrative is intended to provide guidance on the interpretation of royalty provisions of the Quartz Mining Act  579 KB. It has no legal status. For the specifics of any aspect of the royalty requirements, refer to the Quartz Mining Act  579 KB. 

The narrative addresses certain specific aspects of the QMA royalty. While considering these parts, it is important to maintain perspective on the royalty regime as a whole. The narrative does not address or discuss all aspects of the royalty requirements, some specific components are clear enough in the QMA to not have need of additional explanation or interpretation.

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Background

Under the QMA, royalty is a share of profits from a mine in the Yukon acquired under the QMA or the (predecessor) Yukon Quartz Mining Act, reserved for the Yukon government as owner of the mineral rights, for permitting extraction of mineral resources. It is paid by a mine owner or operator to the Yukon government. It is not a tax.

Mineral rights over most of the Yukon are held by the territorial government. In areas where a Yukon First Nation has settled a land claim, there may also be lands with mineral title held by the First Nation. Some of these lands (referred to as Category A Settlement land) are subject to existing mineral claims held by third parties. As part of the negotiated Final Agreements, the Yukon government continues to administer the mineral claims on settlement land through the encumbering rights provision. This provision provides government with the ability to manage the claims under the authority of the QMA. In this situation, permitting, licencing and collection of royalties continue with the Yukon government. Royalties paid on Category A Settlement lands will flow to the respective First Nation. 

The QMA was enacted by the Yukon government in 2003, in accordance with the devolution of control and administration of mineral rights from the federal government to the Yukon. 

The main issues addressed in this narrative are:

  • consolidated royalty filing 
  • reporting and payment periods
  • royalty rate
  • determination of royalty
  • royaltiable income
    → value of mine output – gross receipts
    → valuation of mine output at the pit mouth – treatment charges
    → valuation of mine output at the pit mouth – stockpiles
    → actual market value of mine output – hedging excluded
  • eligible deductions
    → transportation of product to point of sale
    → working expenses of the mine
    → light, power and transportation
    → food and provisions for employees
    → depreciation allowance
    → exploration and development expense deductibility
    → income tax deductibility (Corporate taxes are deductable; deductability of income tax is limited to Yukon mining income; managing the circular deductibility of income tax and royalty; and amending to royalty return)
  • royalty form
  • royalty assessment and audit

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Summary description of the royalty

The QMA royalty is a share of profits from mining pursuant to the QMA in the Yukon, paid by a mine owner or operator to the Yukon government, through the Commissioner, for the right to extract mineral resources. 

The royalty is payable annually, on an escalating rate basis, for any profits from mining that exceed $10,000. The royaltiable profit is the amount by which the value of annual output from mining (revenues) exceeds eligible deductions (costs) for the year.

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Consolidated filing

An individual or corporation with mining production in the Yukon files a consolidated royalty return for all its mining activity in the Yukon. That is, net profits from multiple mine operations operated by the same person, or same general management or control, are combined into a single royalty return. (Ref: 102(2))

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Royalty calendar - reporting and payment periods

The royalty is determined on a calendar year basis. Royalty accrues as of January 1 in the year following production (Ref: 102(3)). An annual royalty return is required to be filed by April 1 (Ref: 102(9)), and payment of royalty is due on October 1 (Ref: 102(3)) of that year.

Royalty calendar

Mine production year end December 31, year 0
Royalty deemed to accrue January 1, year 1
Royalty return filing date April 1, year 1
Royalty payment due October 1, year 1

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Royalty rate

Royalty is payable on an escalating rate basis for annual profits from mining that exceed $10,000. (Ref: 102(1))

QMA Royalty Rate Table

On annual profits of greater than: and up to: Royalty rate (applied to the increment)
$0 $10,000 0%
$10,000 $1 million 3%
$1 million $5 million 5%
$5 million $10 million 6%
$10 million for each additional $5 million a proportional increase of 1%
 
The specified incremental royalty rates apply to profits within each specified increment, not to the total profits. That is, for net profits of $8 million, the royalty would be:

Royalty calculation example

  Net Profits Rate Royalty
on the first $10,000 0% $0
on the next $990,000 3% $29,700
on the next $4 million 5% $200,000
on the next $3 million 6% $180,000
Total $8 million   $409,700

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Basis for Royalty: Profits

The amount of royalty due is a portion of profits from mining in the Yukon. The royaltiable profit is the amount by which the market value of the annual output from mining (revenues), determined at the pit’s mouth, exceeds eligible deductions (costs) for the year. (Ref: 102(4))

Royaltiable profit  =  Revenues from mining  –  Eligible deductions

The determination of royaltiable profit is complicated. There are significant issues in quantifying both the revenue and expense parameters of the general equation for profit. These will be addressed separately in the following sections. Some of the issues discussed are also the subject of specific Interpretation Bulletins providing additional guidance, as annexed to this narrative.

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Royalty Returns

Royalty returns are to be submitted annually (Ref: 102(9)), in the form prescribed by Yukon Energy, Mines and Resources. (See: Interpretation Bulletin – Subsection 102(9) – Royalty Return Form) The royalty return consists of three parts:

Identification

  • name and description of the mine;
  • name and address of the person or persons owning or operating the mine; and
  • the name or names of the smelter or mill and the locality to which the ore, minerals, or mineral-bearing substances, or any part of them, were sent.

Calculation of the royalty

  • the quantity and grades of ore, minerals, and mineral bearing substances shipped or sent from or treated on the mining premises during the year;
  • the actual market value of the output of the mine during the year (Ref: 102(4)), as: total receipts from sales, and/or actual market value of mine output, less:
    - the cost of making the sales;
    - the cost for transportation to the smelter, refinery, or mill; and
    - smelter, refinery and mill charges.
  • the aggregate amount of eligible expenses, payments, allowances, or deductions for the relevant year (Ref: 102(5));
  • the annual profits subject to royalty; and
  • the royalty owing.

Supporting documentation

  • detailed summary of the calculation of each of amounts forming the basis of the royalty;
  • supporting documents to demonstrate the basis of the royalty calculations; and
  • a report reconciling the annual profits and royalty calculations for the year to the audited corporate annual financial statements of the mine owner or operator for the year.

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Royalty Assessment and Audit

Royalty returns will be assessed annually by Yukon Energy, Mines and Resources, with the assessment reported back to the filer. Returns may also be subject to periodic audit.

Any additional royalty amounts owing as a result of an assessment or audit will accrue immediately, and be due for payment on the normal payment date of the respective royalty.

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Annexes: Interpretation Bulletins

Determination of Revenue and Deductions