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A national minerals policy
A national minerals policy G.R. Hjorleifson
G.B. Hjorleifson is Senior Adviser, Mineral Development Sector, Department of Energy, Mines and Resources, Ottawa, Canada.
has been frequently noted by the Canadian politician, political scientist, and historian - and it is an observation shared by most students of federated systems - that a national policy is difficult to achieve in a federated system, particularly in one such as Canada. It seems that only a calamity such as a world war or a national disaster permits the emergence of a national policy; even during such periods these policies are subject to intense regional stresses. Notwithstanding this serious, if not insurmountable, constraint, the governments of Canada are currently undertaking the task of developing a national minerals policy. This major commitment is meeting with successes, each of which is relatively small, but in total they indicate that a national minerals policy is being enunciated. Most Canadians are unaware, or at best vaguely aware, of the role the mineral industry plays in Canada’s economy. The industry employs some 12% of Canada’s labour force, directly and indirectly, and the total value of production in 1974 ($11.6 x lop) accounted for 8.4% of GNP.’ About 60% of total mineral production is exported to more than 90 countries and represents nearly 35% of Canada’s total commodity exports (and a much greater percentage if manufactured goods of mineral origin are included). Changes in global economic conditions can have a serious impact on the Canadian mineral industry and hence on the economic wellbeing of the nation. This reinforces the close relationship of the industry to many Canadian economic and social problems such as the rate and direction of economic development, domestic adequacy of supply of minerals, environmental control, Canadian ownership and the role of the resource adequacy, content, taxation, multinational firm. It
The planning process ’ Towards a Minaral Policy for Canada Opportunities for Choice (Ottawa. Information Canada, 1974) p 24
36
Canada sought to address itself to these problems and to its future global role the need for a review of the nation’s minerals policy
As
RESOURCES
POLICY
March
1976
became necessary. In a letter to the Minister of Energy, Mines and Resources on 9 October 1970 the Prime Minister supported the need ‘to have a comprehensive review of mineral policies’. The responsibility was assigned to the Mineral Development Sector of Energy, Mines and Resources. In a further letter of 26 November 1970 the Prime Minister stated that the department must have ‘an adequate capacity for economic analysis and to develop policy recommendations in the areas that relate to the commercial and economic aspects of mineral resource industries’. In response to these initiatives, the federal minister and the provincial ministers responsible for mineral policy held a series of meetings from which was developed a major policy commitment to conduct a national Mineral Policy Review consisting of five phases: Phase I: Definition of the mineral policy goal and objectives. Phase II: Delineation of the emphasis to be placed on objectives. Phase ZZZ:Definition of appropriate strategies and tactics to achieve the priority objectives. Phase IV: Implementation of these policy strategies and tactics. Phase V: Evaluation of results and policy adjustments. While Phase I was not intended to identify policy options or the role of any one government, it was considered as the first step in government cooperation. Both Phase I and Phase II are now completed.2 Phase III is currently under way, consisting of some fifteen commodity studies plus some ten studies of a general nature (eg, a macro-economic study of supply and demand for metals and manpower and regional mineral development). Certain basic concepts emerged from Phase I of the Mineral Policy Review. These are set forth in Figure 1 and can be summarised in the stated goal that a national mineral policy must ‘obtain optimum benefit for Canada from present and future use of minerals’.3
Policy options and basic issues
‘Phase I concerned itself with most of the major minerals excluding fossil fuels: Mineral Policy Objectives for Canada (Ottawa, Inform&ion Canada, 1973) 34pp. Phase II resulted in the publication of Towards a Mineral Policy for Canada Opportunities for Choice, (Ottawa, Information Canada, 1974) 65pp. 3 Mineral Policy Objectives for Canada, P 16 4These options, taken from Towards a Mineral Policy for Canada are also discussed by A. Powis in his paper
RESOURCES
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March
Since not all the objectives summarised in Figure 1 can be attained to the same extent at any one time, Phase II was designed to determine where the emphasis should be placed in developing a national minerals policy. Four options were enunciated:4 to continue to encourage maximum mineral production; to encourage economic diversification mineral-based through increased mineral processing and manufacturing; to obtain the highest possible net financial returns to Canadians from minerals; and to conserve mineral resources for longterm domestic requirements. The evolution of a minerals policy based on a choice of these options should obtain inputs from political and corporate institutions, government and industry executives, and public and private sector management ,and research personnel; the policy must evolve within a federated system in which federal and provincial governments have different roles and responsibilities. The policy developed must apriori fulfil both national needs and aspirations and must be responsive to Canada’s international commitments, especially those to the less developed countries. As a result of Phase I and Phase II research and the work under 1976
37
Figure
1. Mineral
policy
goals
and ob-
jectives
way in Phase III, certain basic issues prominent of these are discussed below.
are emerging.
The more
Domestic adequacy of supply The government of Canada, through the respective ‘Mines Ministers’, have stated in the Foreword to Towards a Mineral Policyfor Canada that ‘Whatever direction mineral policy may take in the future, the first consideration must be to ensure an adequate supply of minerals, whether from domestic or foreign sources to meet Canadian needs’ (P 5).
‘Non-renewable’ resources are conceived of as being physically non-renewable, suggesting a depleting or wasting resource ‘exhausted’ at some point in time as determined by economic conditions. Because of the concept of ‘exhaustibility’ the Department of Energy, Mines and Resources has undertaken a mine-by-mine production analysis of all existing mines plus known deposits likely to be mined up to the year 2000. The results of this analysis5 indicate the following supply conditions:*
(1) Zinc, lead, molybdenum,
‘Canadian Drolet, Nonferrous Metals Industry and Mineral Policy’, A presentation to the members of the EEC Nonferrous Mission to Canada (8 September 1975) pp 19-39
5 Jean-Paul
*This is discussed in detail in the paper by.Martin, Cranstone, and Zwartendyk.
38
(2)
and copper requirements for expected domestic and export needs can essentially -be met until the midand possibly late 198Os, after which increasing production will have to come from deposits not yet found. With a required lead time of some six years, a major exploration effort must begin now. Nickel and iron ore requirements can be met into the next century from operating mines plus known but undeveloped deposits. RESOURCES
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March
1976
(3)
(4)
Uranium domestic and export needs can be met until the 1990s from existing mines. However, if Canada wishes to continue to participate in the rapidly expanding world market, new production capacity must be generated rapidly. Asbestos, potash, and sulphur reserves are adequate in relation to expected demand to beyond the year 2000.
While the expectation of generating further reserves by exploration and development is generally considered to be excellent, the governments of Canada are necessarily concerned about security of supply for certain commodities. This concern has been acutely reinforced by the current difficulties in quantifying Canada’s oil and natural gas reserves and in predicting their future demand and supply conditions (especially in the mid-term). Foreign control The degree of foreign control of industry is much higher in Canada than in any other industrialised country in the world. On the basis of the latest figures it is estimated that about half of Canadian mining, smelting, and refining and about three-quarters of the petroleum and natural gas industries are controlled by residents of other countries. This very sensitive national issue is further accentuated by the fact that close to 60% of manufacturing is also foreign controlled and that some 80% of the chemical, transportation equipment, and machinery industry and more than 90% of the automobile, computer, and rubber products industries are offshore controlled. G.F.G. Hughes6 has posed the question to an international audience: ‘What would be the reaction in your country if well over half of your industries were owned and controlled by foreign investors?’ This condition is causing concern to all governments in Canada; one of the stated objectives of Mineral Policy Objectives for Canada is to ‘promote and encourage increased Canadian ownership, control and participation with emphasis on the development of Canadian firms’ (p 26). Given this objective, it appears that ownership structures will change in the future. This will not result from some ‘buy-back’ programme; rather, as new production is planned, effective Canadian control will be a basic requirement. Also, the industry will be required to meet the provisions of the Foreign Investment Review Act (Parts I and II), the objective of which is to ensure that any acquisition of control by non-Canadians of an existing business or the development of a new business will be of significant benefit to Canada. Phase I of the Foreign Investment Review Act came into effect on 9 April 1974 and relates to the take-over of Canadian businesses by non-Canadians. Phase II came into effect on 15 October 1975 and relates to the establishment in Canada of new foreign-controlled businesses (both foreign businesses entering Canada for the first time and foreign businesses already in Canada seeking diversification). Further processing
6 G.F.G. Hughes, notes for an address the EEC Nonferrous Metals Mission Canada, 8 September 1975, p 1 RESOURCES
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March
to to
The extensive Canadian resource base provides the strength to improve resource processing ability and the industrial fabric. This can be achieved by producing metals and minerals and transforming them into manufactured goods to supply to the world, as well as by 1976
39
providing a reasonable proportion of partially processed material to processing plants already in existence in industrialised parts of the world. The desire for further processing of Canada’s minerals to provide greater value-added downstream benefits and broader employment opportunities has been clearly stated in Towards a Mineral Policy for Canada: ‘Mineral policy should first seek, wherever possible, to increase diversification and growth of national and regional economies based on minerals. This would include not only increased mineral processing but also more mineral-based manufacturing prior to export, and strengthened ties with other sectors of the economy’ (p 4). The governments recognise that Canada, as an open economy, is very sensitive to the rewards from mineral exports and that to increase the penetration of international markets with prime metals instead of concentrates will require sensitive adjustments to foreign tariff policies (currently being discussed in the GATT negotiations).
Revenue sharing Over the past few years an issue has emerged which dominates the development of a mineral policy - what portion of the earnings of the industry are to accrue to the federal treasury, to the provincial treasury, and to the industry? To appreciate the complexity of this problem the reader must be aware that in any discussion of Canadian mineral policy it is essential to recognise that the provinces own and administer the mineral resources within their boundaries and can therefore control the rate and terms of development of these resources. Notwithstanding the provincial jurisdictions, the federal government can and does exert a strong influence on the industry through its constitutional powers which enable it to control interprovincial and international trade, as well as through its fiscal and monetary policies.’ The complex problem of revenue sharing and taxation policy is discussed in more detail below.
Federal and provincial taxation
7The
federal-provincial interface is absent in the Canadian landmass north of the 60th parallel where the federal government has unilateral jurisdiction 8 Hon. E.J. Benson, Minister of Finance, Proposal for Tax Reform, (Ottawa, Information Canada, 1969)
40
During early 1967 the Carter Commission Report on Taxation (the work of the Royal Commission on Taxation under the chairmanship of Kenneth Le M. Carter) was released; after an extended period of vigorous public debate the federal government released a Proposalfor Tax Reform.s This document effectively established the general policy position of the federal government on taxation of the Canadian mining industry and stated that ‘the government recognizes that special rules were and still are needed in determining the income and taxation income of a mineral operator but that the rules of the game should be less generous’ (p 64). In summary, the main aspects of this bygone ‘generous’ tax system were that: the first three years income from a new mine was exempt from income tax; income from mining and the processing of mineral ores up to the prime metal stage was reduced by 33+“/, for the purpose of calculating taxable income (automatic depletion); mining assets (building, machinery, and equipment) were entitled to 30% capital cost allowance rate; and exploration and development costs were deductible immediately up to the amount of income. RESOURCES
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1976
Bill C-259 was introduced on 18 June 1971 and came into force on 1 January 1972 (it was revised in 1974). The federal government’s mining taxation policy was henceforth to be: ‘continue tax incentives in order to recognize the risks involved in exploration and development, the international competition for capital and the level of incentives available in other countries, while at the same time making really profitable projects subject to a reasonable level of taxation’ (p 46).9 The main changes to the federal tax system as a result of Bill C-259 are given in the Appendix and are summarised below: (1) (2) (3) (4) (5) (6)
9 Hon.
E.J. Benson. Summary of 1971 Tax Reform Legislation (Ottawa. Information Canada, 197 1) p 46 ” ‘Non-deductibility’ means that the corporations, in calculating federal tax returns, cannot deduct any provincial levies as corporate operating costs.
RESOURCES
POLICY
termination of the three-year tax exempt period for new mines; accelerated capital cost allowance for new mine assets or assets related to a major expansion in lieu of the three-year exemption; substitution of earned depletion for automatic depletion at a maximum rate of 25% of resource income (May 1974); a special resource’abatement of 15 points of tax; an earned depletion allowance for custom ore processors; provincial mining taxes became non-deductible (effective May 1974); includes royalties and other government levies (see below).
This last provision has been the cause of extended and often bitter debate in Canada. For many years the provinces of Canada had levied a mining tax on operating mines (in addition to the provincial share of the federal corporate income tax). The rate varied between the provinces, but until 1974 it did not exceed 15%, and provincial royalties were confined to industrial and construction minerals. Bill C-259 clearly stated that provincial mining taxes were to be non-deductible and implied - by lack of definition - that royalties were to remain deductible in calculating federal tax returns. Inevitably there were revisions of provincial views on royalties and rates and a marked movement upward; the rapid increase in metal prices during 1973- 1974 further reinforced provincial views, resulting in revision to provincial mining tax rates in a number of provinces. British Columbia introduced a Mineral Land Tax Act in 1973, a Mineral Royalties Act in 1974, and also revised the Coal Act; Saskatchewan introduced a Potash Reserve Tax in 1974; Manitoba raised the rates of taxation in 1974 and introduced the Metallic Royalty Act in 1975; Ontario increased the rates of taxation in 1974; Quebec increased tax rates in 1974; and Nova Scotia increased royalties and taxable income under the Mineral Resources Act and the Gypsum Mining Income Tax Act, respectively, in 1975. This is not the end of such changes; at present. Quebec and Saskatchewan are reviewing their provincial tax structures, as is Newfoundland. By the time of the May 1974 budget higher provincial tax rates and royalties were of such an order of magnitude that if the government had not imposed non-deductibility lo its tax base from minerals and mining would have been effectively negated. As a result of the November 1974 and June 1975 budgets, the major features of the current federal income tax systems applicable to production income from mining are as follows. (1) (2)
March 1976
A basic corporate tax rate of 46% with 10 points of abatement available. A resource allowance deduction from income of 25% of resource production profits calculated after operating expenses 41
(3)
(4)
(5)
(6)
(7) (8)
and capital cost allowance but before deduction of interest expenses, exploration, and development of earned depletion.” Earned depletion allowance deduction of up to 25% of production profits will continue and will be determined after the deduction of resource allowance, interest, and exploration and development expenses. Disallowance of provincial levies (royalties, taxes, etc.) continues but the resource allowance (see above) recognises these levies and takes them into account. The special resource abatement of 15% is discontinued, resulting in a net federal tax rate of 36%, an increase from the previous rate of 25%. A 5% tax credit against federal income tax for specified investments (buildings, machinery, and equipment acquired in Canada) between 23 June 1975 and 1 July 1977 as an encouragement to investment in Canada. Exploration expenses are deductible up to the amount of income, while development expenses can be amortised at a 30% rate. Accelerated write-off provisions for new mine assets or assets that are in respect of a major expansion of an existing mine will continue.
The tax changes in the June 1975 budget represent a practical way of acknowledging provincial resource levies and of taking them into account, up to some reasonable limit, in determining federal taxable income, and it is hoped that these changes will provide the provinces with scope for adjusting their own mining taxes. Also, since the resource allowance (2 above) will be deducted before exploration and development and earned depletion, these changes will make the aftertax cost of exploration and development substantially less. Thus, companies with substantial exploration expenditures will pay less tax under this new system, and those who do not explore and develop will face a small tax increase.12 Government and industry
” In the Budget Speech of June 23, 1975 the Minister of Finance, the Hon John N. Turner, stated that there were two objectives in resource taxation: some form of deductibility in the tax system for provincial resource levies, and an incentive for those who explore and develop and a greater tax liability for those who do not. These two objectives were met by the resource allowance and by allowing exploration and development expenses and the depletion they earn against a net federal tax rate of 36% rather than the lower 25% (cf, Budget Speech, pp 33-34) I2 R.D. Hutchinson, ‘Canadian Mineral Policy from the Federal Viewpoint, Paper at the American Iron Ore Association, Hamilton, Ontario (26 June 1975)
42
Phase III of the Mineral Policy Review - the definition of strategies and tactics - is now being developed. The earlier phases and current research clearly show that any national mineral policy must be based on the present structure of the industry, but must possess sufficient flexibility to enable a response to various federal-provincial aspirations while adhering to the priorities decided on in Phase II. A comprehensive consultative process has been developed by which to review and criticise the various research documents which form the background to Phase III. The process consists of the distribution of research material as ‘discussion documents draft only’ to other government departments, to the provinces, to industry, to various professional associations allied to the mining industry, and to various university research centres. This primary distribution is being followed up with meetings and written critiques which will lead to final re-drafting and completion of the documents. It is recognised that this process is time-consuming; however, only by such a process is it possible to set out the required goals and objectives for the mining industry which are also reasonable and acceptable to all parties concerned. As stated in Towards a Mineral RESOURCES
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1976
Policy fir Canada: ‘It is essential that mineral policy be flexible in light of diversities among regions, differences between mineral commodities, and changing economic and social conditions. Nevertheless, a choice on policy directions must be made’ (p 4).
Conclusions During Phase I and II of a Mineral Policy Review certain key issues emerged. These are: domestic adequacy of supply; foreign control of Canadian industry; the desire to shape a policy which will assist in industrial development and diversification; and the desire to fulfil international commitments. In dealing with these issues, Canada is developing a national minerals policy which already has several measureable results.
(1)
(2) (3)
(4)
(5)
(6)
Modifications to the federal taxation system have been undertaken, particularly in the vexatious area of nondeductibility. The major policy instrument is the resource allowance which acknowledges, up to some reasonable level, provincial resource taxation. The Foreign Investment Review Act will make a major contribution over time to an ownership system calling for greater Canadian control of the industry. Extensive work is being conducted in the area of reserve and resource computation, permitting a better understanding of Canada’s mineral endowment. Canada desires to export more metal and less concentrates, while at the same time reasonably honouring its commitments to existing foreign processing plants; ie, a better export mix is sought. Recent major additions to Ontario’s nickel and copper smelting-refining industry indicate that changes are taking place. An extensive and essential consultative process has been established across a broad spectrum of the industry and governments, complemented by the academic community, various associations and specific interested persons. The industry itself is becoming more responsive to its ‘interfacing’ to government.
It should not be assumed that the learning process embodied in the mineral policy review exercise is biased solely in favour of the industry. This is not so - the various governments are being exposed to a major learning process. Reasonable, responsible citizens - be they politicians, industry leaders, or public servants - are fully conscious that this learning process must go forward with dedication. Only by such commitment can a mineral policy capable of responding to Canada’s national and international responsibilities be developed.
Acknowledgement The author is indebted to Mr E. Hodgson, Director of the Mining Industry Financial and Corporate Analysis Division of the Mineral Development Sector in the Department of Energy, Mines and RESOURCES
POLICY
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1976
43
Resources, Canada for assistance and a critique of much of the taxation material herein. However, the views expressed and their interpretations are the sole responsibility of the author.
Appendix
FEDERAL
BUDGET
Tax changes -
23 JUNE
mining and petroleum
Item
Pre-reform
Tax reform
-
1972
Tax rates
Basic rate of 50% on production profits of mining and petroleum corporations, subject to 10% provincial abatement applicable to all corporations.
As for other corporations, basic rate goes down one point annually after 1972 to 46% in 1976. Tax abated 15 additional percentage points after 1976 for mining production profits, together with cancellation of deduction for provincial mining taxes.
1975 companies
Budget -
18 November
1974
Basic corporate rate of 50% established for both mining and petroleum production profits, subject to new resource profit abatement in addition to normal (10%) provincial abatement, effecttive 7 May 1974. Net federal tax thereby reduced. Net Abatetax ments rate Nor- New mal Mining
10%
15%
25%
Petroleum 1974 1975 1976
10% 10% 10%
10% 12% 15%
10% 28% 25%
Budget -
23 June 1975
Effective 1 January 1976 basic corporate rate of 46% established for both mining and petroleum production profits, subject to normal (10%) provincial tax abatement. New resource profit abatements established by 18 November 1974 Budget to be withdrawn effective 1 January 1976.
Provincial mining taxes, royalties and other like payments
Deductible by mining and petroleum corporations
Royalties and rentals generally deductible. Provincial mining taxes or income related royalties not deductible by mining corporations after 1976.
Effective 7 May 1974, all payments to provinces with respect to the acquisition, ownership or development of a resource property no longer deductible by resource corporations in computing taxable income.
Non-deductibility of payments to provinces to continue, but resource allowance introduced, effective January 1, 1976, in recogniti& of payments. Resource allowance deduction will be 25% of resource production profits calculated after operating expenses and capital cost allowance but before the deduction of interest expense, exploration and development, and earned depletion.
Operators’ depletion
Automatic depletion allowances permitted reduction of production profits by 332%
Automatic depletion to continue to end of 1976. Thereafter, depletion ‘earned’ by eligible expenditures and development and on exploration and development and certain capital expenditures, deductible at maximum rate of 33 $% of production
Earned depletion system to commence effective 7 May 1974. Rate of claiming reduced to 25% of annual production profits from 33+0/o.
No change from 18 November 1974 Budget provisions. Earned depletion deduction to be claimed after deduction of 25% resource allowance, interest, and exploration and development.
profits. $3 of eligible expenditures after 7 November 1969 earn $1 of depletion.
44
Rate of earning remained at $1 of depletion for each $3 of eligible expenditure.
RESOURCES
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March
1976
Item
Pre-reform
Nonoperators’ depletion
Depletion of 25%
Tax reform allowance
-
1972
Rate of 25% continues to end of 1976. Thereafter, such rentals and royalties treated as production income eligible for 33 5% earned depletion.
Budget -
18 November
Effective
7 May 1974
1974
rentals and royalties treated as production income eligible for earned depletion but annual rate of claiming reduced to 25% from 33 i%.
Budget - 23 June 1975 Effective
1 January
1976
new
25% resource allowance to apply to individuals as well as corporations with earned depletion rate of claiming at 25% per year after deduction of resource allowance, interest and exploration and development.
Canadian exploration and development expenses: Principal business taxpayers
Deductible to extent of income in year or any subsequent year.
No change
Exploration expenditures deductible at 100% or to extent of income. Development expenses, including acquisition cost of mineral properties, incurred after 6 May 1974, deductible at rate of 30% of unclaimed balance.
No change from 18 November 1974 Budget provisions.
‘Non-principaj business taxpayers
Deductible only from mining and petroleum income.
Deductible from income from resource or 20% of unclaimed balance, whichever greater
Expenditures incurred after 6 May 1974 dedrjctible at rate of 30% of unclaimed balance.
No change from 18 November 1974 Budget provisions.
Three-year exemption from income taxation
Available to eligible new mines.
Exemption terminated at end of 1973. Accelerated capital cost allowance avaiiable for new mines and major expansions.
No change
No change
Capital cost allowance (depreciation)
Buildings, mining machinery and equipment at rate of 30% declining balance.
Accelerated depreciation on assets related to a new mine, to the extent of income from the new mine (100%).
No change
No change
Nil
Tax liability may be reduced by tax credit against federal income tax with credit developed at 5% of investment on specified items made in period between 23 June 1975 and 1 July 1977. Credit effective 24 June 1975.
Also applies to certain assets related to expansion of an existing mine where the milling capacity is increased by at least 25%. I nvest ment tax credit
Nil
RESOURCES
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Nil
March 1976
45
G.B. Hjorleifson is Senior Adviser, Mineral Development Sector, Department of Energy, Mines and Resources, Ottawa, Canada.
has been frequently noted by the Canadian politician, political scientist, and historian - and it is an observation shared by most students of federated systems - that a national policy is difficult to achieve in a federated system, particularly in one such as Canada. It seems that only a calamity such as a world war or a national disaster permits the emergence of a national policy; even during such periods these policies are subject to intense regional stresses. Notwithstanding this serious, if not insurmountable, constraint, the governments of Canada are currently undertaking the task of developing a national minerals policy. This major commitment is meeting with successes, each of which is relatively small, but in total they indicate that a national minerals policy is being enunciated. Most Canadians are unaware, or at best vaguely aware, of the role the mineral industry plays in Canada’s economy. The industry employs some 12% of Canada’s labour force, directly and indirectly, and the total value of production in 1974 ($11.6 x lop) accounted for 8.4% of GNP.’ About 60% of total mineral production is exported to more than 90 countries and represents nearly 35% of Canada’s total commodity exports (and a much greater percentage if manufactured goods of mineral origin are included). Changes in global economic conditions can have a serious impact on the Canadian mineral industry and hence on the economic wellbeing of the nation. This reinforces the close relationship of the industry to many Canadian economic and social problems such as the rate and direction of economic development, domestic adequacy of supply of minerals, environmental control, Canadian ownership and the role of the resource adequacy, content, taxation, multinational firm. It
The planning process ’ Towards a Minaral Policy for Canada Opportunities for Choice (Ottawa. Information Canada, 1974) p 24
36
Canada sought to address itself to these problems and to its future global role the need for a review of the nation’s minerals policy
As
RESOURCES
POLICY
March
1976
became necessary. In a letter to the Minister of Energy, Mines and Resources on 9 October 1970 the Prime Minister supported the need ‘to have a comprehensive review of mineral policies’. The responsibility was assigned to the Mineral Development Sector of Energy, Mines and Resources. In a further letter of 26 November 1970 the Prime Minister stated that the department must have ‘an adequate capacity for economic analysis and to develop policy recommendations in the areas that relate to the commercial and economic aspects of mineral resource industries’. In response to these initiatives, the federal minister and the provincial ministers responsible for mineral policy held a series of meetings from which was developed a major policy commitment to conduct a national Mineral Policy Review consisting of five phases: Phase I: Definition of the mineral policy goal and objectives. Phase II: Delineation of the emphasis to be placed on objectives. Phase ZZZ:Definition of appropriate strategies and tactics to achieve the priority objectives. Phase IV: Implementation of these policy strategies and tactics. Phase V: Evaluation of results and policy adjustments. While Phase I was not intended to identify policy options or the role of any one government, it was considered as the first step in government cooperation. Both Phase I and Phase II are now completed.2 Phase III is currently under way, consisting of some fifteen commodity studies plus some ten studies of a general nature (eg, a macro-economic study of supply and demand for metals and manpower and regional mineral development). Certain basic concepts emerged from Phase I of the Mineral Policy Review. These are set forth in Figure 1 and can be summarised in the stated goal that a national mineral policy must ‘obtain optimum benefit for Canada from present and future use of minerals’.3
Policy options and basic issues
‘Phase I concerned itself with most of the major minerals excluding fossil fuels: Mineral Policy Objectives for Canada (Ottawa, Inform&ion Canada, 1973) 34pp. Phase II resulted in the publication of Towards a Mineral Policy for Canada Opportunities for Choice, (Ottawa, Information Canada, 1974) 65pp. 3 Mineral Policy Objectives for Canada, P 16 4These options, taken from Towards a Mineral Policy for Canada are also discussed by A. Powis in his paper
RESOURCES
POLICY
March
Since not all the objectives summarised in Figure 1 can be attained to the same extent at any one time, Phase II was designed to determine where the emphasis should be placed in developing a national minerals policy. Four options were enunciated:4 to continue to encourage maximum mineral production; to encourage economic diversification mineral-based through increased mineral processing and manufacturing; to obtain the highest possible net financial returns to Canadians from minerals; and to conserve mineral resources for longterm domestic requirements. The evolution of a minerals policy based on a choice of these options should obtain inputs from political and corporate institutions, government and industry executives, and public and private sector management ,and research personnel; the policy must evolve within a federated system in which federal and provincial governments have different roles and responsibilities. The policy developed must apriori fulfil both national needs and aspirations and must be responsive to Canada’s international commitments, especially those to the less developed countries. As a result of Phase I and Phase II research and the work under 1976
37
Figure
1. Mineral
policy
goals
and ob-
jectives
way in Phase III, certain basic issues prominent of these are discussed below.
are emerging.
The more
Domestic adequacy of supply The government of Canada, through the respective ‘Mines Ministers’, have stated in the Foreword to Towards a Mineral Policyfor Canada that ‘Whatever direction mineral policy may take in the future, the first consideration must be to ensure an adequate supply of minerals, whether from domestic or foreign sources to meet Canadian needs’ (P 5).
‘Non-renewable’ resources are conceived of as being physically non-renewable, suggesting a depleting or wasting resource ‘exhausted’ at some point in time as determined by economic conditions. Because of the concept of ‘exhaustibility’ the Department of Energy, Mines and Resources has undertaken a mine-by-mine production analysis of all existing mines plus known deposits likely to be mined up to the year 2000. The results of this analysis5 indicate the following supply conditions:*
(1) Zinc, lead, molybdenum,
‘Canadian Drolet, Nonferrous Metals Industry and Mineral Policy’, A presentation to the members of the EEC Nonferrous Mission to Canada (8 September 1975) pp 19-39
5 Jean-Paul
*This is discussed in detail in the paper by.Martin, Cranstone, and Zwartendyk.
38
(2)
and copper requirements for expected domestic and export needs can essentially -be met until the midand possibly late 198Os, after which increasing production will have to come from deposits not yet found. With a required lead time of some six years, a major exploration effort must begin now. Nickel and iron ore requirements can be met into the next century from operating mines plus known but undeveloped deposits. RESOURCES
POLICY
March
1976
(3)
(4)
Uranium domestic and export needs can be met until the 1990s from existing mines. However, if Canada wishes to continue to participate in the rapidly expanding world market, new production capacity must be generated rapidly. Asbestos, potash, and sulphur reserves are adequate in relation to expected demand to beyond the year 2000.
While the expectation of generating further reserves by exploration and development is generally considered to be excellent, the governments of Canada are necessarily concerned about security of supply for certain commodities. This concern has been acutely reinforced by the current difficulties in quantifying Canada’s oil and natural gas reserves and in predicting their future demand and supply conditions (especially in the mid-term). Foreign control The degree of foreign control of industry is much higher in Canada than in any other industrialised country in the world. On the basis of the latest figures it is estimated that about half of Canadian mining, smelting, and refining and about three-quarters of the petroleum and natural gas industries are controlled by residents of other countries. This very sensitive national issue is further accentuated by the fact that close to 60% of manufacturing is also foreign controlled and that some 80% of the chemical, transportation equipment, and machinery industry and more than 90% of the automobile, computer, and rubber products industries are offshore controlled. G.F.G. Hughes6 has posed the question to an international audience: ‘What would be the reaction in your country if well over half of your industries were owned and controlled by foreign investors?’ This condition is causing concern to all governments in Canada; one of the stated objectives of Mineral Policy Objectives for Canada is to ‘promote and encourage increased Canadian ownership, control and participation with emphasis on the development of Canadian firms’ (p 26). Given this objective, it appears that ownership structures will change in the future. This will not result from some ‘buy-back’ programme; rather, as new production is planned, effective Canadian control will be a basic requirement. Also, the industry will be required to meet the provisions of the Foreign Investment Review Act (Parts I and II), the objective of which is to ensure that any acquisition of control by non-Canadians of an existing business or the development of a new business will be of significant benefit to Canada. Phase I of the Foreign Investment Review Act came into effect on 9 April 1974 and relates to the take-over of Canadian businesses by non-Canadians. Phase II came into effect on 15 October 1975 and relates to the establishment in Canada of new foreign-controlled businesses (both foreign businesses entering Canada for the first time and foreign businesses already in Canada seeking diversification). Further processing
6 G.F.G. Hughes, notes for an address the EEC Nonferrous Metals Mission Canada, 8 September 1975, p 1 RESOURCES
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March
to to
The extensive Canadian resource base provides the strength to improve resource processing ability and the industrial fabric. This can be achieved by producing metals and minerals and transforming them into manufactured goods to supply to the world, as well as by 1976
39
providing a reasonable proportion of partially processed material to processing plants already in existence in industrialised parts of the world. The desire for further processing of Canada’s minerals to provide greater value-added downstream benefits and broader employment opportunities has been clearly stated in Towards a Mineral Policy for Canada: ‘Mineral policy should first seek, wherever possible, to increase diversification and growth of national and regional economies based on minerals. This would include not only increased mineral processing but also more mineral-based manufacturing prior to export, and strengthened ties with other sectors of the economy’ (p 4). The governments recognise that Canada, as an open economy, is very sensitive to the rewards from mineral exports and that to increase the penetration of international markets with prime metals instead of concentrates will require sensitive adjustments to foreign tariff policies (currently being discussed in the GATT negotiations).
Revenue sharing Over the past few years an issue has emerged which dominates the development of a mineral policy - what portion of the earnings of the industry are to accrue to the federal treasury, to the provincial treasury, and to the industry? To appreciate the complexity of this problem the reader must be aware that in any discussion of Canadian mineral policy it is essential to recognise that the provinces own and administer the mineral resources within their boundaries and can therefore control the rate and terms of development of these resources. Notwithstanding the provincial jurisdictions, the federal government can and does exert a strong influence on the industry through its constitutional powers which enable it to control interprovincial and international trade, as well as through its fiscal and monetary policies.’ The complex problem of revenue sharing and taxation policy is discussed in more detail below.
Federal and provincial taxation
7The
federal-provincial interface is absent in the Canadian landmass north of the 60th parallel where the federal government has unilateral jurisdiction 8 Hon. E.J. Benson, Minister of Finance, Proposal for Tax Reform, (Ottawa, Information Canada, 1969)
40
During early 1967 the Carter Commission Report on Taxation (the work of the Royal Commission on Taxation under the chairmanship of Kenneth Le M. Carter) was released; after an extended period of vigorous public debate the federal government released a Proposalfor Tax Reform.s This document effectively established the general policy position of the federal government on taxation of the Canadian mining industry and stated that ‘the government recognizes that special rules were and still are needed in determining the income and taxation income of a mineral operator but that the rules of the game should be less generous’ (p 64). In summary, the main aspects of this bygone ‘generous’ tax system were that: the first three years income from a new mine was exempt from income tax; income from mining and the processing of mineral ores up to the prime metal stage was reduced by 33+“/, for the purpose of calculating taxable income (automatic depletion); mining assets (building, machinery, and equipment) were entitled to 30% capital cost allowance rate; and exploration and development costs were deductible immediately up to the amount of income. RESOURCES
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Bill C-259 was introduced on 18 June 1971 and came into force on 1 January 1972 (it was revised in 1974). The federal government’s mining taxation policy was henceforth to be: ‘continue tax incentives in order to recognize the risks involved in exploration and development, the international competition for capital and the level of incentives available in other countries, while at the same time making really profitable projects subject to a reasonable level of taxation’ (p 46).9 The main changes to the federal tax system as a result of Bill C-259 are given in the Appendix and are summarised below: (1) (2) (3) (4) (5) (6)
9 Hon.
E.J. Benson. Summary of 1971 Tax Reform Legislation (Ottawa. Information Canada, 197 1) p 46 ” ‘Non-deductibility’ means that the corporations, in calculating federal tax returns, cannot deduct any provincial levies as corporate operating costs.
RESOURCES
POLICY
termination of the three-year tax exempt period for new mines; accelerated capital cost allowance for new mine assets or assets related to a major expansion in lieu of the three-year exemption; substitution of earned depletion for automatic depletion at a maximum rate of 25% of resource income (May 1974); a special resource’abatement of 15 points of tax; an earned depletion allowance for custom ore processors; provincial mining taxes became non-deductible (effective May 1974); includes royalties and other government levies (see below).
This last provision has been the cause of extended and often bitter debate in Canada. For many years the provinces of Canada had levied a mining tax on operating mines (in addition to the provincial share of the federal corporate income tax). The rate varied between the provinces, but until 1974 it did not exceed 15%, and provincial royalties were confined to industrial and construction minerals. Bill C-259 clearly stated that provincial mining taxes were to be non-deductible and implied - by lack of definition - that royalties were to remain deductible in calculating federal tax returns. Inevitably there were revisions of provincial views on royalties and rates and a marked movement upward; the rapid increase in metal prices during 1973- 1974 further reinforced provincial views, resulting in revision to provincial mining tax rates in a number of provinces. British Columbia introduced a Mineral Land Tax Act in 1973, a Mineral Royalties Act in 1974, and also revised the Coal Act; Saskatchewan introduced a Potash Reserve Tax in 1974; Manitoba raised the rates of taxation in 1974 and introduced the Metallic Royalty Act in 1975; Ontario increased the rates of taxation in 1974; Quebec increased tax rates in 1974; and Nova Scotia increased royalties and taxable income under the Mineral Resources Act and the Gypsum Mining Income Tax Act, respectively, in 1975. This is not the end of such changes; at present. Quebec and Saskatchewan are reviewing their provincial tax structures, as is Newfoundland. By the time of the May 1974 budget higher provincial tax rates and royalties were of such an order of magnitude that if the government had not imposed non-deductibility lo its tax base from minerals and mining would have been effectively negated. As a result of the November 1974 and June 1975 budgets, the major features of the current federal income tax systems applicable to production income from mining are as follows. (1) (2)
March 1976
A basic corporate tax rate of 46% with 10 points of abatement available. A resource allowance deduction from income of 25% of resource production profits calculated after operating expenses 41
(3)
(4)
(5)
(6)
(7) (8)
and capital cost allowance but before deduction of interest expenses, exploration, and development of earned depletion.” Earned depletion allowance deduction of up to 25% of production profits will continue and will be determined after the deduction of resource allowance, interest, and exploration and development expenses. Disallowance of provincial levies (royalties, taxes, etc.) continues but the resource allowance (see above) recognises these levies and takes them into account. The special resource abatement of 15% is discontinued, resulting in a net federal tax rate of 36%, an increase from the previous rate of 25%. A 5% tax credit against federal income tax for specified investments (buildings, machinery, and equipment acquired in Canada) between 23 June 1975 and 1 July 1977 as an encouragement to investment in Canada. Exploration expenses are deductible up to the amount of income, while development expenses can be amortised at a 30% rate. Accelerated write-off provisions for new mine assets or assets that are in respect of a major expansion of an existing mine will continue.
The tax changes in the June 1975 budget represent a practical way of acknowledging provincial resource levies and of taking them into account, up to some reasonable limit, in determining federal taxable income, and it is hoped that these changes will provide the provinces with scope for adjusting their own mining taxes. Also, since the resource allowance (2 above) will be deducted before exploration and development and earned depletion, these changes will make the aftertax cost of exploration and development substantially less. Thus, companies with substantial exploration expenditures will pay less tax under this new system, and those who do not explore and develop will face a small tax increase.12 Government and industry
” In the Budget Speech of June 23, 1975 the Minister of Finance, the Hon John N. Turner, stated that there were two objectives in resource taxation: some form of deductibility in the tax system for provincial resource levies, and an incentive for those who explore and develop and a greater tax liability for those who do not. These two objectives were met by the resource allowance and by allowing exploration and development expenses and the depletion they earn against a net federal tax rate of 36% rather than the lower 25% (cf, Budget Speech, pp 33-34) I2 R.D. Hutchinson, ‘Canadian Mineral Policy from the Federal Viewpoint, Paper at the American Iron Ore Association, Hamilton, Ontario (26 June 1975)
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Phase III of the Mineral Policy Review - the definition of strategies and tactics - is now being developed. The earlier phases and current research clearly show that any national mineral policy must be based on the present structure of the industry, but must possess sufficient flexibility to enable a response to various federal-provincial aspirations while adhering to the priorities decided on in Phase II. A comprehensive consultative process has been developed by which to review and criticise the various research documents which form the background to Phase III. The process consists of the distribution of research material as ‘discussion documents draft only’ to other government departments, to the provinces, to industry, to various professional associations allied to the mining industry, and to various university research centres. This primary distribution is being followed up with meetings and written critiques which will lead to final re-drafting and completion of the documents. It is recognised that this process is time-consuming; however, only by such a process is it possible to set out the required goals and objectives for the mining industry which are also reasonable and acceptable to all parties concerned. As stated in Towards a Mineral RESOURCES
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1976
Policy fir Canada: ‘It is essential that mineral policy be flexible in light of diversities among regions, differences between mineral commodities, and changing economic and social conditions. Nevertheless, a choice on policy directions must be made’ (p 4).
Conclusions During Phase I and II of a Mineral Policy Review certain key issues emerged. These are: domestic adequacy of supply; foreign control of Canadian industry; the desire to shape a policy which will assist in industrial development and diversification; and the desire to fulfil international commitments. In dealing with these issues, Canada is developing a national minerals policy which already has several measureable results.
(1)
(2) (3)
(4)
(5)
(6)
Modifications to the federal taxation system have been undertaken, particularly in the vexatious area of nondeductibility. The major policy instrument is the resource allowance which acknowledges, up to some reasonable level, provincial resource taxation. The Foreign Investment Review Act will make a major contribution over time to an ownership system calling for greater Canadian control of the industry. Extensive work is being conducted in the area of reserve and resource computation, permitting a better understanding of Canada’s mineral endowment. Canada desires to export more metal and less concentrates, while at the same time reasonably honouring its commitments to existing foreign processing plants; ie, a better export mix is sought. Recent major additions to Ontario’s nickel and copper smelting-refining industry indicate that changes are taking place. An extensive and essential consultative process has been established across a broad spectrum of the industry and governments, complemented by the academic community, various associations and specific interested persons. The industry itself is becoming more responsive to its ‘interfacing’ to government.
It should not be assumed that the learning process embodied in the mineral policy review exercise is biased solely in favour of the industry. This is not so - the various governments are being exposed to a major learning process. Reasonable, responsible citizens - be they politicians, industry leaders, or public servants - are fully conscious that this learning process must go forward with dedication. Only by such commitment can a mineral policy capable of responding to Canada’s national and international responsibilities be developed.
Acknowledgement The author is indebted to Mr E. Hodgson, Director of the Mining Industry Financial and Corporate Analysis Division of the Mineral Development Sector in the Department of Energy, Mines and RESOURCES
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1976
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Resources, Canada for assistance and a critique of much of the taxation material herein. However, the views expressed and their interpretations are the sole responsibility of the author.
Appendix
FEDERAL
BUDGET
Tax changes -
23 JUNE
mining and petroleum
Item
Pre-reform
Tax reform
-
1972
Tax rates
Basic rate of 50% on production profits of mining and petroleum corporations, subject to 10% provincial abatement applicable to all corporations.
As for other corporations, basic rate goes down one point annually after 1972 to 46% in 1976. Tax abated 15 additional percentage points after 1976 for mining production profits, together with cancellation of deduction for provincial mining taxes.
1975 companies
Budget -
18 November
1974
Basic corporate rate of 50% established for both mining and petroleum production profits, subject to new resource profit abatement in addition to normal (10%) provincial abatement, effecttive 7 May 1974. Net federal tax thereby reduced. Net Abatetax ments rate Nor- New mal Mining
10%
15%
25%
Petroleum 1974 1975 1976
10% 10% 10%
10% 12% 15%
10% 28% 25%
Budget -
23 June 1975
Effective 1 January 1976 basic corporate rate of 46% established for both mining and petroleum production profits, subject to normal (10%) provincial tax abatement. New resource profit abatements established by 18 November 1974 Budget to be withdrawn effective 1 January 1976.
Provincial mining taxes, royalties and other like payments
Deductible by mining and petroleum corporations
Royalties and rentals generally deductible. Provincial mining taxes or income related royalties not deductible by mining corporations after 1976.
Effective 7 May 1974, all payments to provinces with respect to the acquisition, ownership or development of a resource property no longer deductible by resource corporations in computing taxable income.
Non-deductibility of payments to provinces to continue, but resource allowance introduced, effective January 1, 1976, in recogniti& of payments. Resource allowance deduction will be 25% of resource production profits calculated after operating expenses and capital cost allowance but before the deduction of interest expense, exploration and development, and earned depletion.
Operators’ depletion
Automatic depletion allowances permitted reduction of production profits by 332%
Automatic depletion to continue to end of 1976. Thereafter, depletion ‘earned’ by eligible expenditures and development and on exploration and development and certain capital expenditures, deductible at maximum rate of 33 $% of production
Earned depletion system to commence effective 7 May 1974. Rate of claiming reduced to 25% of annual production profits from 33+0/o.
No change from 18 November 1974 Budget provisions. Earned depletion deduction to be claimed after deduction of 25% resource allowance, interest, and exploration and development.
profits. $3 of eligible expenditures after 7 November 1969 earn $1 of depletion.
44
Rate of earning remained at $1 of depletion for each $3 of eligible expenditure.
RESOURCES
POLICY
March
1976
Item
Pre-reform
Nonoperators’ depletion
Depletion of 25%
Tax reform allowance
-
1972
Rate of 25% continues to end of 1976. Thereafter, such rentals and royalties treated as production income eligible for 33 5% earned depletion.
Budget -
18 November
Effective
7 May 1974
1974
rentals and royalties treated as production income eligible for earned depletion but annual rate of claiming reduced to 25% from 33 i%.
Budget - 23 June 1975 Effective
1 January
1976
new
25% resource allowance to apply to individuals as well as corporations with earned depletion rate of claiming at 25% per year after deduction of resource allowance, interest and exploration and development.
Canadian exploration and development expenses: Principal business taxpayers
Deductible to extent of income in year or any subsequent year.
No change
Exploration expenditures deductible at 100% or to extent of income. Development expenses, including acquisition cost of mineral properties, incurred after 6 May 1974, deductible at rate of 30% of unclaimed balance.
No change from 18 November 1974 Budget provisions.
‘Non-principaj business taxpayers
Deductible only from mining and petroleum income.
Deductible from income from resource or 20% of unclaimed balance, whichever greater
Expenditures incurred after 6 May 1974 dedrjctible at rate of 30% of unclaimed balance.
No change from 18 November 1974 Budget provisions.
Three-year exemption from income taxation
Available to eligible new mines.
Exemption terminated at end of 1973. Accelerated capital cost allowance avaiiable for new mines and major expansions.
No change
No change
Capital cost allowance (depreciation)
Buildings, mining machinery and equipment at rate of 30% declining balance.
Accelerated depreciation on assets related to a new mine, to the extent of income from the new mine (100%).
No change
No change
Nil
Tax liability may be reduced by tax credit against federal income tax with credit developed at 5% of investment on specified items made in period between 23 June 1975 and 1 July 1977. Credit effective 24 June 1975.
Also applies to certain assets related to expansion of an existing mine where the milling capacity is increased by at least 25%. I nvest ment tax credit
Nil
RESOURCES
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Nil
March 1976
45