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Mining Investments Into The United States

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General discussion of various tax and accounting issues with Canadian corporation investing in U.S. mineral interests.

General discussion of various tax and accounting issues with Canadian corporation investing in U.S. mineral interests.


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  • 1. Investing in U.S. Mineral Properties for Canadian Corporations
  • 2. 2
    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
  • 3. 3
    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
  • 4. 4
    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
  • 5. 5
    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
  • 6. 6
    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
  • 7. 7
    Obtaining a U.S. Real Property Interest
    Example # 1 (Share Exchange)
    CANADA
    USA
    CDN Individuals
    Can Co.
    Can Co..
    Coal Permits
  • 8. 8
    Obtaining a U.S. Real Property Interest
    Example # 1 (Share Exchange) - Continued
    CANADA
    100%
    USA
    Parent Can Co.
    Can Sub Co..
    Coal Permits
  • 9. 9
    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
  • 10. 10
    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
  • 11. 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)
    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
    11
  • 12. 12
    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
  • 13. 13
    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
  • 14. 14
    Passive Interests in U.S. Mineral Properties
    Example # 2 (Permit Transfer)
    CANADA
    100%
    USA
    Parent Can Co.
    Can Co.
    Coal Permits
  • 15. 15
    Passive Interests in U.S. Mineral Properties
    Example # 2 (Permit Transfer) - Continued
    CANADA
    100%
    100 %
    USA
    Parent Can Co.
    Can Co..
    U.S. Co.
    Coal Permits
  • 16. 16
    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
  • 17. 17
    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
  • 18. 18
    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
  • 19. 19
    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
  • 20. 20
    Exploration of U.S. Mineral Properties
    Example # 4 (Spin-Off of Successful Find)
  • 21. 21
    Exploration of U.S. Mineral Properties
    Example # 4 (Spin-Off of Successful Find) - Continued
  • 22. 22
    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
  • 23. 23
    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
  • 24. 24
    Deductibility Issues - Continued
    • Start Up and Organizational Costs
    • 25. Generally amortize over 15 years
    • 26. Depreciation
    • 27. Normally accelerated v. CCA
    • 28. Asset by asset detail – NO BUCKETS!
    • 29. Depreciation is mandatory (not elective)
    • 30. Can create tax losses overall in U.S.
    • 31. Can’t assume deductions are the same for tax purposes on both sides!
  • 25
    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
    Large companies only
    Sarbanes-Oxley
    Potential financial disclosure risks
  • 32. 26
    Final Discussion
    QUESTIONS?