mining investments into the united states
DESCRIPTION
General discussion of various tax and accounting issues with Canadian corporation investing in U.S. mineral interests.TRANSCRIPT
Investing in U.S. Mineral Properties for Canadian Corporations
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Summary of Materials
Mineral and Other “Real Properties” Defined
Owning and Operating U.S. Mineral Properties
Passive Interests in U.S. Mineral Properties
Speculating/Exploration of U.S. Mineral Properties
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Applicable Properties
Mineral Properties Gold, coal, uranium, etc.
Oil and Gas Deposits/Wells Timber Crops Underlying Land and Applicable Improvements Equipment
If used to extract the product, it is also an applicable property!
Severance Point – Main Issues
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Applicable Ownership
Issues Arise with Direct and Certain Indirect Ownership Indirect Examples:
Fee ownership Co-Ownership Leasehold Option to Buy or Lease Indirect or direct rights to share in the profits
(commissions, production payments, installment sales) Permits Royalty Streams
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Dispositions at Issue
Qualifying Dispositions Sale Exchange Contributions to Capital Reorganizations Return of Capital / Excess Dividends Gifts
Mineral Property/Crops/Timber Exceptions If related to “effectively connected income of the United
States”, then exceptions might apply
Elections to Generate “Non-Recognition” Various tests and elections can be made Timeliness is critical
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Withholding Tax Issues
What The Heck is FIRPTA and Why Do I Care? Deals with U.S. real property (see previous examples) Generally a 10% withholding on gross receipt Income from “effectively connected income in U.S.” exempt Ensures U.S. tax is collected on U.S. sourced income from non-
resident taxpayers Certain U.S. domestic (and foreign) corporations (USRPHCs) can
trigger FIRPTA Can affect the seller AND buyer of the applicable property
Royalty Stream (Mineral Deposits, Crops, Timber) 30% withholding on gross payment Elect to be taxed on the net under treaty
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Obtaining a U.S. Real Property Interest
Example # 1 (Share Exchange)
CANADA
USA
CDN Individuals
Can Co..
Can Co.
Coal Permits
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Obtaining a U.S. Real Property Interest
Example # 1 (Share Exchange) - Continued
CANADA
100%
USA
Can Sub Co..
Parent Can Co.
Coal Permits
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Owning and Operating a U.S. Real Property Interest
Mineral Deposits, Timber and Crops
Canadian Corporation Owning Interest Directly Generally effectively connected income File W-8ECI with purchasers No FIRPTA until sale of underlying property (or residual interest) File U.S. foreign corporation return (Form 1120-F) annually Will pay U.S. tax on effectively connected income Earnings attributable to “branch” taxed at 5% upon repatriation
First $ 500,000 CDN exempt under treaty Other potential exemptions
Effective Tax Rate ~ 55% on active income Generally utilize losses against other non-US mineral properties in Can Co. Difficulties may arise operating or obtaining ownership of interests More difficulty isolating Canadian/US risks
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Owning and Operating a U.S. Real Property Interest
Mineral Deposits, Timber and Crops
Canadian Corporation Owning Interest Through U.S. Corporation No FIRPTA issues or other foreign withholding issues File U.S. corporation return (Form 1120) annually Will pay U.S. tax on income Simpler filing Potential transfer pricing issues Repatriated dividends subject to 5% withholding tax Effective Tax Rate ~ 55% on active income Can’t use losses against Can Co. Easier in operating or obtaining ownership of interests
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Deductibility Issues
Development Costs Normally deducted immediately
AMT 10 year write-off AMT reduction of tax benefits by 30% of mineral exploration and
development costs (separate from 10 year write off calc)o AMT 5 year write-off of excess denied amount
Can elect to amortize: Mines – over 10 years Oil and Gas – over 5 years
Depletion Cost v. percentage depletion (greater of two)
Various limits on oil & gas, iron, and coal Percentage depletion goes beyond basis
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Passive Interests in U.S. Mineral Properties
Mineral Deposits, Timber and Crops
Canadian Corporation Owning Interest Directly Should elect to be treated as effectively connected income
Avoids 30% withholding on the gross proceeds
File W-8ECI with purchasers No FIRPTA unless sale of or residual interest File U.S. foreign corporation return (Form 1120-F) Will pay U.S. tax on “effectively connected income” Effective Tax Rate ~ 62% on income
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Passive Interests in U.S. Mineral Properties
Mineral Deposits, Timber and Crops
Canadian Corporation Owning Interest Through U.S. Corporation No FIRPTA issues or other foreign withholding issues File U.S. corporation return (Form 1120) annually Will pay U.S. tax on net income Repatriated dividends subject to 5% withholding tax Effective Tax Rate ~ 55% on passive income
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Passive Interests in U.S. Mineral Properties
Example # 2 (Permit Transfer)
CANADA
100%
USA
Can Co.
Parent Can Co.
Coal Permits
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Passive Interests in U.S. Mineral Properties
Example # 2 (Permit Transfer) - Continued
CANADA
100%
100 %
USA
Can Co..
Parent Can Co.
Coal Permits
U.S. Co.
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Passive Interests in U.S. Mineral Properties
Example # 3 (Who Owns The Interest?)
CANADA
100% ?
USA
?
Can Co..
U.S. Co.
U.S. Oil
Interest
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Exploration of U.S. Mineral Properties
Exploration Expenditures Unless elected otherwise, exploration expenses are capitalized and
depreciable upon reaching development (except acquisition and lease costs)
Election under IRC §617(a) to expense in current year AMT 10 year write-off AMT reduction of tax benefits by 30% of mineral exploration
and development costs (separate from 10 year write off calc) AMT 5 year write-off of excess denied amount
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Exploration of U.S. Mineral Properties
Mineral Deposits, Timber and Crops
Canadian Corporation Owning Interest Directly No FIRPTA until sale of interest File U.S. foreign corporation return (Form 1120-F) annually Usually capitalize all costs associated with property
Avoid recapture and limitations of net operating losses
Will pay U.S. tax on disposition Earnings attributable to “branch” taxed at 5% upon repatriation
First $ 500,000 CDN exempt under treaty Other potential exemptions
Effective Tax Rate ~ 55% on active income Generally utilize losses against other non-US mineral properties in Can Co. More difficulty isolating Canadian/US risks More cumbersome reinvestments in other U.S. properties
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Exploration of U.S. Mineral Properties
Mineral Deposits, Timber and Crops
Canadian Corporation Owning Interest Through U.S. Corporation No FIRPTA issues or other foreign withholding issues File U.S. corporation return (Form 1120) annually Will pay U.S. tax on worldwide income Simpler filing Potential transfer pricing issues Repatriated dividends subject to 5% withholding tax Effective Tax Rate ~ 55% on income Can’t use losses against Can Co. Easier reinvestments in other U.S. properties
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Exploration of U.S. Mineral Properties
Example # 4 (Spin-Off of Successful Find)
CANADA
100% 100% 100%
100%USA
Parent Can Co.
US Sub Co. # 1
US LLC
US Sub Co. # 2 US Sub Co. # 3
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Exploration of U.S. Mineral Properties
Example # 4 (Spin-Off of Successful Find) - Continued
CANADA
100%
100%
100%
USA
100%100%
Parent Can Co.
U.S. Sub Co. # 1
U.S. LLCU.S. Sub Co. # 2
New Can Sub Co.
U.S. Sub Co. # 3
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State Tax Implications
Each U.S. generally has its own taxing authority Generally, if you have in state:
Income Property Payroll
= TAXABLE IN STATE
Potential tax owing even if loss generating from property in state
Other excise, use, sales, franchise taxes may exist
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Deductibility Issues
Transfer Pricing Not reasonable, will not deduct Formal study?
Cross-Border Lending Is it truly debt or equity?
Thin capitalization / character Interest Expense
Is it paid or accrued (IRC § 267)? U.S. interest stripping rules (IRC § 163(j))
Stock Options Deductibility depends on the option Consequences for the company and the recipient
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Deductibility Issues - Continued
Start Up and Organizational Costs Generally amortize over 15 years
Depreciation Normally accelerated v. CCA Asset by asset detail – NO BUCKETS! Depreciation is mandatory (not elective) Can create tax losses overall in U.S.
Can’t assume deductions are the same for tax purposes on both sides!
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Obligation to Report
Auditor Materiality Assessment whether company is compliant
with annual reporting – accrual or disclosure of potential penalties?
FIN 48 Assess “material positions” using “more-likely-
than-not” threshold Potential IRS disclosure will mirror FIN 48
o Large companies only
Sarbanes-Oxley Potential financial disclosure risks
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Final Discussion
QUESTIONS?