Welcome news from the tax front for profitable mines

"Two recent decisions by the Canadian courts could reduce the taxes paid by many profitable mines in Canada. At a time when the mining sector is hurting from an ever increasing tax burden and soft prices, the results of two cases are welcome news. Mining companies are well advised to check prior years' tax returns in the context of these developments. IntroductionSince 1976, the income tax legislation has provided a reduced rate of tax for taxpayers engaged in the mining of mineral resources, through the mechanism of the ""resource allowance"". The deduction given for the resource allowance effectively reduces the federal rate of tax by one quarter on resource profits. In general terms, ""resource profits"" are defined to include a taxpayer's income from: the production and processing in Canada of ore to any stage that is not beyond the prime metal stage (or the pellet stage or its equivalent in the case of iron ore); and, royalties computed with reference to the amount of value of production from mining operations in Canada.In computing income from these sources, the taxpayer must deduct expenses that may reasonably be regarded as applicable to those sources, with the exception of expenditures for Canadian exploration and development or financing costs.As a result of the mechanics of the calculation of the resource allowance, one quickly realizes that the lower the expenses deducted from the resource profits, the higher the resource profits and consequently the higher the 25% resource allowance. The impact of the recent court cases is to narrow the range of expenses which are required to be deducted in the determination of the resource profits.The two cases are outlined below."