Effects of Taxation on Base Metal Mining in Canada

Abstract

In their book, Effects of Taxation on Base Metal Mining in Canada, Brian Mackenzie and Michel Bilodeau have made a most significant and unique contribution to the methodology and practice of tax system evaluation for the metallic mineral industries. The study is based on a detailed evaluation of the circumstances under which some 124 mineral deposits, each with different endowment characteristics and discovered between 1951 and 1974, might be considered for development and production given the tax rules prevailing in Canada and Ontario, Quebec, Manitoba and British Columbia. The authors develop an evaluation technique which measures potential net benefits to society realizable before and after the imposition of current and hypothetically optional taxation systems. A computer-based inventory of deposits containing information on contained metals, grades, mining costs and metal prices is used in the evaluation of life of project rates of return before taxes for each deposit. Sub-economic deposits are then dropped from further analysis. Potentially economic deposits are then evaluated in the context of hypothetical and real tax systems; the influence of taxation on the number of economic deposits is then measured. The net value to society under various tax systems is estimated as the net private and public worth of the economic projects (after tax private sector income plus revenues to the public sector). The authors' major conclusion is that current mineral taxation policies in Canada are ineffective in realizing the full potential worth of mineral development. Some provincial systems are judged to have decidedly adverse long term consequences for the mineral sector compared to the authors' preferred system, one based on rate-of-return taxation. They maintain that investment incentive in, and societal benefits from, the mineral sector can be preserved and enhanced through such a preferred system although they fail to evaluate inter-sectoral distortions that might be created by mineral taxation modifications without parallel changes in other sectors of the economy. Mackenzie and Bilodeau's contribution has been widely reviewed by Canadian mineral taxation practitioners and was put forward at a time when there was (and continues to be) considerable uncertainty regarding appropriate mineral taxation policies. Some provinces and the federal government have taken modest, but ad hoc, steps toward more appropriate systems which recognize some of the authors' criticisms. However, mineral tax policy in Canada remains complex and different in each province. This is further compounded by persistently differing provincial and federal views as to what constitutes appropriate tax jurisdiction, policy and revenue sharing. In short, the Canadian mosaic syndrome is as true of culture as it is of the business of government and enterprise. Regardless of the practicality of introducing a major structural and philosophical change to the systems of mineral taxation in Canada, the authors' contribution must be taken as a serious and very sound approach to the theory and practice of designing tax systems to maximize the contribution of mining in the Canadian economy.