October 14, 2017
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Canada is a world leader in the mining industry, both in terms of domestic production and international presence. Canada’s success is due to its abundance of natural resources and top-tier production and processing capabilities, as well as its stable and favourable legal and tax regimes. The country’s wealth of mineral resources range from industrial raw materials to various precious and base metals.
Historically, over half of the world’s public mining companies are listed on the Toronto Stock Exchange and TSX-Venture exchanges, and approximately 57 per cent of the equity capital raised globally for mining companies was raised on these exchanges in 2016. Canadian mining companies have interests in over 100 countries, spanning North and South America, Africa, Australasia and Europe, with the majority of these companies’ assets located in the Western hemisphere. As well, Canada has one of the largest mining supply sectors globally, with more than 3,400 companies supplying engineering, geotechnical, environmental, financial and other services to mining operations.1
- Exploration and mining rights
- Foreign investment
- Tax considerations
- Capital raising
- Environmental, health and safety regulations
- Indigenous considerations
1. Exploration and mining rights
Mining activities in Canada are primarily governed by the legislation of the province or territory in which a project is located. The federal government has overlapping jurisdiction in a number of areas, such as taxation and environmental protection.
As a general framework, if a party wishes to explore a mineral property in Canada, it must first obtain exploration rights over the property pursuant to relevant provincial or territorial mining legislation — typically on a first-come, first-served basis. Once a party has successfully completed exploration programs and identified mineral reserves warranting project development and mine construction, it must obtain a mining lease along with environmental and other permits.
Following a physical or, in some cases, map-based or online staking process of mineral claims, the particulars of such claims are recorded with the appropriate local authority. Before any claims may be staked, a prospecting or similar licence must usually be obtained. A claimholder, or their assignee, is typically required to perform a minimum annual amount of prescribed assessment work on the area subject to the mineral claims (or make a payment in lieu of work), and provide information about the presence of a mineral deposit and whether development of the deposit is intended. Under this system, so long as the claim is maintained in good standing and the minimum requirements of the applicable legislation have been met, the claimholder is entitled to apply for and receive a mining lease.
A mining lease allows an individual or a company the right to extract minerals from the area(s) to which the lease applies. Mining leases are:
- Issued for a specific term, which is renewable (a mining lease in Ontario, for example, has an initial term of 21 years and is renewable for a further 21-year term);
- Subject to an annual rental charge; and
- Transferable with prior written consent of the appropriate government.
In some cases, a plan of survey and evidence that surface rights have been secured must also be filed.
As with other countries, the complex environmental and social issues associated with mining development in Canada must be addressed, including consideration of local community and Indigenous rights and consultation processes. Lastly, mine closure plans to rehabilitate and restore mining properties are required by mining regulations, with reclamation activities generally required throughout mine life.
2. Foreign investment
Before acquiring any exploration or mining interest — whether directly or through a participation interest (be it debt, equity, option, joint venture, royalty or other interest) — it is important for investors to conduct comprehensive due diligence to confirm the existence and validity of the mineral and mining rights, and other assets acquired, as well as to identify any title defects or encumbrances. It is always advisable to carefully consider Canadian tax, environmental and contractual liabilities, which may result from the acquisition or investment. Other aspects to be considered include availability of power, water and other infrastructure, surface ownership and access, and labour and community issues (including Indigenous rights).
The legislative framework whereby large-scale investments in Canada can be reviewed by the federal government is contained in the Investment Canada Act (ICA). For further details on the ICA, see the chapter on the regulation of foreign investment. In addition, mergers and acquisitions are regulated federally under the Competition Act.
Canada is party to a number of trade and investment agreements containing investor protection provisions. These agreements generally permit an investor of a foreign country to bring a claim against the Canadian government for a breach of an obligation owed, by either the federal government or a province, to the investor under the treaty. They also protect Canadian investments in other countries.
3. Tax considerations
Canada imposes tax on Canadian mining operations at three levels:
- Federal income tax is imposed on the taxable income from a mining operation carried on in Canada — generally calculated as mining revenues less deductible operating expenses, capital depreciation to the extent allowed by the tax rules, and certain deductions for exploration and pre-production development costs.
- Provincial or territorial income tax is imposed on the taxable income from a mining operation carried on in Canada in a manner similar to federal income tax.
- Provincial or territorial mining taxes are imposed based on a separate calculation of production profits, revenues and other criteria.
In general, certain provincial or territorial income tax that is levied on income from a mining operation carried on in that province or territory is deductible in computing income for federal income tax purposes. As well, Crown royalties are usually deductible in computing income for federal income tax purposes.
Mining activity is very important to the Canadian economy and, as a result, Canada offers a variety of tax incentives to the mining industry. These tax incentives include enhanced deductions, allowances and credits that may be claimed against income from the mining operation, and special tax incentives for investors in mining companies.
Flow-through shares are a tax-favourable mechanism to finance an exploration or mining company that qualifies as a “principal-business corporation.” The tax rules allow such a corporation to “renounce” certain Canadian development expenses and Canadian exploration expenses to investors who hold flow-through shares. In high-risk industries such as mining and oil and gas, startup corporations may not at first be profitable and therefore may not be able to make immediate use of expenses incurred from business operations. Investors who hold flow-through shares may claim the renounced expenses as deductions in computing their own income — subject to certain restrictions — up to the amount the investor paid for the flow-through shares.
Residents of Canada who own or invest in a mining project are taxed in Canada on their worldwide income, including income from the mining project. In contrast, non-residents of Canada are only subject to Canadian income tax on income from carrying on a business in Canada, income from employment exercised in Canada, and capital gains arising from the disposition of taxable Canadian property. As a result, a non-resident who carries on a mining or exploration business in Canada will be taxed on the income from that business, and — since Canadian mineral properties are considered to be taxable Canadian property — will also generally be subject to Canadian tax on any gain from the disposition of a Canadian mineral property. In some cases, a non-resident will be protected from Canadian tax by a tax treaty. Canada has entered into tax treaties with a number of other countries, which can ameliorate the Canadian tax consequences for residents of those countries.
To help ensure that the applicable Canadian tax is collected from non-residents, special notification and withholding rules may apply to non-residents who own or invest in a Canadian mining project. For more information, see the section on “General application of Canadian tax to non-residents” in the taxation chapter.
4. Capital raising
Raising capital through the Canadian markets is governed by provincial and territorial securities laws and regulators. For a detailed summary of the important legal and business issues that must be considered when raising capital in Canada, see the chapter on securities law and corporate governance.
National Instrument 43-101 — Standards of Disclosure for Mineral Projects (NI 43-101) establishes standards for the public disclosure of scientific and technical information regarding mineral projects. Canadian securities regulators require that any such disclosure intended to be, or reasonably likely to be, made available to the Canadian public must comply with NI 43-101.
Two of the principal requirements under NI 43-101 are:
- That the disclosure of scientific or technical information with respect to a mineral project on a property material to the issuer must be based on a technical report or other information concerning the mineral project. Such information must be prepared by or under the supervision of a “qualified person.”
- That the public disclosure of mineral resources and reserves be made using the categories established by the Canadian Institute of Mining, Metallurgy and Petroleum.
5. Environmental, health and safety regulations
The mining industry in Canada is subject to federal, provincial and territorial environmental laws and regulations. In most instances, the environmental assessment process requires the preparation of environmental studies and public information or consultation. A social impact study may also be required. A closure plan is required in most jurisdictions prior to the commencement of mining operations. Financial securities may also be required to cover mine reclamation costs.
Health and safety issues are addressed through the relevant federal or provincial legislation that regulates minimum employment standards, labour relations, and occupational health and safety.
6. Indigenous considerations
Canadian governments have a duty to consult, accommodate and, in some circumstances, obtain the consent of Indigenous communities with respect to projects that may affect their rights or lands. There are few, if any, resource projects in Canada that do not require consideration of this issue. Canadian courts have also recognized that some lands are subject to Aboriginal title, in which case the consent of the Indigenous community is required for any access or development.
Other lands are subject to certain restrictions arising from either historical or modern treaty agreements with Indigenous groups, or specific rights such as the right of Indigenous groups to hunt, fish and trap on the land. Indigenous groups can challenge government authorizations that allow mining activities if they risk adversely impacting claimed or proven Aboriginal or treaty rights.
Although, as a matter of law, the duty of consultation is generally the responsibility of the applicable level of government and not the private sector, in practice, project proponents frequently take a lead role in engaging with affected Indigenous communities to try to find common ground for the development of a project. A common feature of such efforts are side agreements with affected Indigenous communities, which avoid the delays and costs that an Indigenous challenge may otherwise bring. This is a highly specialized and dynamic area of the law, and it is advisable to seek the assistance of experienced counsel with expertise in this area.
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