Despite the multiple global challenges brought on by the COVID-19 pandemic, Canada has remained a world leader in the mining sector. In particular, the incentives provided for under the federal income tax and provincial income/mining/royalty tax regimes, in their many forms, are alive and well.
This insight is intended to keep you informed of our latest tax litigation successes in the field of mining. Recently, we have successfully litigated tax reassessments on behalf of three mining companies.
In two of these files, the taxpayer was reassessed on the basis that certain expenses it had incurred were allegedly not "Canadian Exploration Expenses". The Québec Revenue Agency also took the position that certain expenses incurred by the taxpayer qualified as "Canadian Exploration and Development Overhead Expenses" (CEDOE), a qualification that is detrimental to the eligibility to most, if not all, federal and provincial tax incentives. In the third file, a party dealing at arm's length with the taxpayer paid a substantial sum of money to the taxpayer for the option to purchase a portion of the taxpayer's resource property. Such payment was characterized as a non-government assistance by the Québec Revenue Agency, therefore reducing the taxpayer's expenses eligible for the computation of the 38,75% Québec refundable resource income tax credit1.
In the first file, after a lengthy trial, the judge of the Court of Québec rendered a favorable decision in favour of the taxpayer with respect to certain expenses. In fact, the judge considered that the salary of the president of the taxpayer, a junior mining corporation, his travel expenses to visit the taxpayer's exploration sites, the costs of a field geology training paid for an employee, as well as certain equipment that must be replaced by the taxpayer on a yearly basis, were incurred by the taxpayer for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada. Therefore, said expenses met the purpose test to qualify as "Canadian Exploration Expenses".
The judgement included important positions taken by the judge regarding said expenses which we have summarized below.
When determining whether a salary expense qualifies as a CEDOE, legislation provides that the salary will fall within the ambit of said definition unless the duties of the employee are all or substantially all related to exploration or development activities. With the case law to support such a position, it was argued that "substantially all" does not necessarily mean more than 90%, an interpretation adhered to by the judge. In fact, the judge clearly states in the decision that:
"[T]he expression "substantially all" does not lend itself, for its application, to the use of a simple mathematical formula and should not be interpreted as corresponding to a given proportion established in an arbitrary way. On the contrary, this expression is somewhat elastic and the meaning to be given to it must take into account the circumstances and the context in which it is applied."2
The judge ruled in favor of the taxpayer that the salary of the president of the junior mining corporation did not qualify as a CEDOE because his activities were substantially all related to exploration activities
In determining whether the president's salary qualified as a CEDOE, the judge pointed out that the taxpayer presented prima facie proof thereby meeting its initial burden of overcoming the presumptions on which the Minister relied in making his assessments3. The judge took the opportunity to point out the burden of the tax authority in such a case. Indeed, the judge specified that the tax authority "did not rebut the prima facie evidence and thus failed to demonstrate by a preponderance of evidence that the president's duties were not "wholly or substantially" related to exploration or development activities."4
On another note, it is interesting to note that the Quebec Revenue Agency filed a motion to dismiss the file two days before the trial, a legal proceeding that the judge considered to be excessive and abusive. The judge ordered the Quebec Revenue Agency to pay the legal fees of the taxpayer in connection with this excessive proceeding.
In the second file, halfway through the trial, the case was settled between the taxpayer and the Québec Revenue Agency. Our position was that exploration activities of a mining company extend beyond the primary exploration phase and that an expense may be incurred for more than one purpose. It has always been our view that in order for expenses to qualify as "Canadian Exploration Expenses" the purpose test does not require that exploration be the primary or dominant purpose for which the expense is incurred. Therefore, a taxpayer who incurs expenses for more than one purpose should generally be able to treat them as "Canadian Exploration Expenses" when one of those purposes is to determine the existence, extent or quality of a mineral resource.
In the third file, the audit department of the Quebec Revenue Agency had based the reassessment on a commonly used tax interpretation enclosing a legal analysis that could be viewed as incomplete5. In fact, the Quebec Revenue Agency audit department had erroneously considered that the sum of money received by the taxpayer as payment for an option was targeted by a broad catch-all income tax provision6 and, as a result, qualified as a non-government assistance for the purposes of the Québec refundable resource income tax credit therefore reducing the taxpayer's expenses eligible to said credit. An out-of-court settlement was reached with the Quebec Revenue Agency according to which the amount received by the taxpayer for the option no longer reduced the expenses eligible for the credit.
Takeaways
The foregoing is a brief overview of expenses challenged by the Québec Revenue Agency in specific situations. If you would like further clarifications with respect to the definitions of "Canadian Exploration Expenses", "Canadian Exploration and Development Overhead Expenses" or "non-government assistance" in the context of credit applications, flow-through share financings or other tax incentives, Emmanuel Sala and Shereen Cook would be pleased to have a personalized discussion with you in this regard. Any other legal tax-related mining issue may also be addressed.
Footnotes
1. 1029.8.36.170 of the Taxation Act (Quebec).
2. Ressources Eastmain inc. c. Agence du revenu du Québec, 2021 QCCQ 4379, (Eastmain), paragraphs 239 et 240 [Our translation].
3. Eastmain, paragraph 271 [Our translation].
4. Eastmain, paragraph 281 [Our translation].
5. Lettre d'interprétation de Revenu Québec 15-0247450991 « Crédit d'impôt remboursable relatif à des ressources minières, pétrolières, gazières ou autres - Société titulaire d'un claim en vertu de la Loi sur les mines - Autre société étrangère ouvrant dans la prospection et l'exploitation minière - Notion d'aide gouvernementale », 28 avril 2015.
6. Paragraph 87(1)(w) of the Taxation Act (Québec), equivalent provision to paragraph 12(1)(x) of the Income tax Act (Canada).
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