The Tiresome Road to a Fair Tax for Quebec's Miners

Global Business Reports

MONTREAL, CANADA – The mining industry is no stranger to risk, and its industry leaders are more skilled than most in dealing with the impact of politics on their business. However, few Canadian miners, who own or operate approximately three quarters of the world’s mines, expect political uncertainty to jeopardize operations in their own backyard. While Québec cannot claim to be the biggest mining province in Canada, it spent several years in the last decade as the country’s most favoured jurisdiction.

In 2011, the peak of the most recent global cycle, exploration, extraction, and associated manufacturing represented 3.4% of the provincial economy and nearly 25% of its exports. That same year, mining employed 17,000 Quebecers, and indirectly supported a further 17,000 jobs. In 2013, cornered by difficult market conditions on the one hand, and an attempted revamp of the province’s mining tax regime by its new government on the other, the Québec mining industry’s golden age has been disrupted by an unfamiliar lack of stability.

Economic cycles aside, it is difficult to argue against the intimate correlation between Québec’s tax system and global perceptions of the province’s viability as a mining jurisdiction. From 2007 to 2010, the province was ranked by the Fraser Institute, a think tank, as the world’s number one mining jurisdiction. This was largely due to it having the lowest taxes on mining of any of Canadian province. Getting the top spot while the global mining industry was in an upswing was a coup for Québec. Capitalizing on the increased activity, in 2010 the Québec Government raised the tax rate on mining profits from 12% to 16%.

Crucially, the government also revised the system to tax profits on a mine-to-mine basis. This was a significant step, as it prevented companies holding more than one mine asset from using a loss-making mine to mitigate the tax liability of a profit-making one. Altogether, the new measures reversed Québec’s position in Canada, turning it into the highest taxed province for mining. In the 2011-2012 fiscal year, this brought the government $365 million in revenue, approximately 4% of the total value of all extracted ore. Québec’s prestige, however, suffered, as the 2011/2012 Fraser Institute Global Mining Survey knocked Québec down to fifth place.

Within two years of the new tax system being put in place, Québec’s general elections saw the formation of a minority government led by the francophone nationalist party, the Parti Québécois (PQ). As part of its election campaign, the PQ publicly proclaimed that the previous tax regime on the mining industry was insufficient in providing the provincial government, and the people of Québec, with a ‘fair take’ of the province’s mineral wealth. The PQ initially mooted the idea of a 5% ad valorem tax on all ore extraction, with a potential increase to 30% for companies with production passing a certain ‘exceptional’ threshold. With such a policy, the party aimed to generate as much as $388 million per year for the government.

In the wake of the election, and amidst a heated debate on the future of mining regulation, the Québec Government’s finance department commissioned PriceWaterhouseCoopers (PWC), an auditing firm, to carry out a series of surveys of global mining tax regimes in order to assess which model was right for the typical iron ore mine in Québec. Because of the relatively low grade of most of Québec’s ore, the remote locations of many of its mines, and the generally small size of its projects, PWC concluded at the beginning of 2013 that changes to the regime were undesirable and that the optimal tax system was the one already in place. Within the Québec Government itself, there was disagreement over whether or not and how far the PQ should scale back its tax ambitions. The Minister of Finance and Economy, Nicolas Marceau, had been vocal in his view that the changes, spearheaded by Natural Resources Minister Martine Ouellet, risked going too far.

Although no formal policies had been announced, the perceived severity of the government’s stance sent a shockwave of uncertainty through the Québec mining industry. Two of Québec’s most important mining players, Iamgold and Goldcorp, threatened to halt any expansion in the province if the government did not alter its position. In its 2012/2013 Global Mining Survey, the Fraser Institute once again downgraded Québec’s ranking, this time to 11th place.

In March, in a bid to demonstrate its desire for dialogue and good faith, the government participated with industry leaders in a number of ‘town hall’-style public forums, which resulted in no agreements being made. Behind the scenes, companies such as Osisko and ArcelorMittal, as well as various trade associations, held one-on-one discussions with the government to find a tenable compromise. Meanwhile, legal and financial service providers to the mining industry were assuring investors that the government could not afford to be too drastic.

On May 6, 2013, Minister Ouellet formally announced a proposal for a hybrid tax regime. Widely seen as a compromise, the new system will require companies to pay the greater amount of either (i) an ad valorem royalty rate of 1% for all ore extraction up to the $80 million mark or 4% for extraction beyond that threshold, or (ii) a progressive tax of 16%, 22%, or 28% of an operator’s profit margins as they increase.

Emmanuel Sala, a trained accountant and lawyer at Blakes in Montréal, has stated that “any tax based primarily on income, without regard to profitability of the mine” is counterproductive because it “ignores the cyclical nature of the mining industry,” which dictates operators’ profit margins. This threatens to render a number of Québec’s already struggling projects unfeasible in the coming years. Josée Méthot, president of the Québec Mining Association, agrees. In an interview with the Wall Street Journal, she has said that there is only one option that makes the most sense, and that is “a mining tax solely based on profits.”

The new system has also proved a disappointment to the Parti Québécois’s own base, as it is predicted to generate between $73 million and $200 million in revenues every year. This is very wide of the government’s initial target of $388 million. Furthermore, environmental lobbyists continue to insist that the government could have done more.

In retrospect, the Parti Québécois’s foray into mining tax reform seems quixotic. Elected at the tail end of the last mining cycle, the government, like its predecessor, endeavoured to capitalize on the perception that margins were high and mining firms were amassing wealth with impunity. In doing so, the PQ sought to win favour from the political left and finance Québec’s enormous provincial debt. The end result, however, is a lukewarm compromise in the middle of a tough period for mining and metals. The new tax regime in Québec is far from the nightmare scenario initially feared during the election campaign. Even so, it may take years before operators in la belle province can shake the feeling that they are caught in a bad dream.