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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.

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Mining Investments Into The United States

  1. 1. Investing in U.S. Mineral Properties for Canadian Corporations<br />
  2. 2. 2<br />Summary of Materials<br />Mineral and Other “Real Properties” Defined<br />Owning and Operating U.S. Mineral Properties<br />Passive Interests in U.S. Mineral Properties<br />Speculating/Exploration of U.S. Mineral Properties<br />
  3. 3. 3<br />Applicable Properties <br />Mineral Properties<br />Gold, coal, uranium, etc.<br />Oil and Gas Deposits/Wells<br />Timber<br />Crops<br />Underlying Land and Applicable Improvements<br />Equipment<br />If used to extract the product, it is also an applicable property!<br />Severance Point – Main Issues<br />
  4. 4. 4<br />Applicable Ownership<br />Issues Arise with Direct and Certain Indirect Ownership<br />Indirect Examples:<br />Fee ownership<br />Co-Ownership<br />Leasehold<br />Option to Buy or Lease<br />Indirect or direct rights to share in the profits (commissions, production payments, installment sales)<br />Permits<br />Royalty Streams<br />
  5. 5. 5<br />Dispositions at Issue<br />Qualifying Dispositions<br />Sale<br />Exchange<br />Contributions to Capital<br />Reorganizations<br />Return of Capital / Excess Dividends<br />Gifts<br />Mineral Property/Crops/Timber Exceptions<br />If related to “effectively connected income of the United States”, then exceptions might apply<br />Elections to Generate “Non-Recognition”<br />Various tests and elections can be made<br />Timeliness is critical<br />
  6. 6. 6<br />Withholding Tax Issues<br />What The Heck is FIRPTA and Why Do I Care?<br />Deals with U.S. real property (see previous examples)<br />Generally a 10% withholding on gross receipt<br />Income from “effectively connected income in U.S.” exempt<br />Ensures U.S. tax is collected on U.S. sourced income from non-resident taxpayers<br />Certain U.S. domestic (and foreign) corporations (USRPHCs) can trigger FIRPTA<br />Can affect the seller AND buyer of the applicable property<br />Royalty Stream (Mineral Deposits, Crops, Timber)<br />30% withholding on gross payment<br />Elect to be taxed on the net under treaty<br />
  7. 7. 7<br />Obtaining a U.S. Real Property Interest<br />Example # 1 (Share Exchange)<br />CANADA<br />USA<br />CDN Individuals<br />Can Co.<br />Can Co..<br />Coal Permits<br />
  8. 8. 8<br />Obtaining a U.S. Real Property Interest<br />Example # 1 (Share Exchange) - Continued<br />CANADA<br />100%<br />USA<br />Parent Can Co.<br />Can Sub Co..<br />Coal Permits<br />
  9. 9. 9<br />Owning and Operating a U.S. Real Property Interest<br />Mineral Deposits, Timber and Crops<br />Canadian Corporation Owning Interest Directly<br />Generally effectively connected income<br />File W-8ECI with purchasers<br />No FIRPTA until sale of underlying property (or residual interest)<br />File U.S. foreign corporation return (Form 1120-F) annually<br />Will pay U.S. tax on effectively connected income<br />Earnings attributable to “branch” taxed at 5% upon repatriation<br />First $ 500,000 CDN exempt under treaty<br />Other potential exemptions<br />Effective Tax Rate ~ 55% on active income<br />Generally utilize losses against other non-US mineral properties in Can Co.<br />Difficulties may arise operating or obtaining ownership of interests<br />More difficulty isolating Canadian/US risks<br />
  10. 10. 10<br />Owning and Operating a U.S. Real Property Interest<br />Mineral Deposits, Timber and Crops<br />Canadian Corporation Owning Interest Through U.S. Corporation<br />No FIRPTA issues or other foreign withholding issues<br />File U.S. corporation return (Form 1120) annually<br />Will pay U.S. tax on income<br />Simpler filing<br />Potential transfer pricing issues<br />Repatriated dividends subject to 5% withholding tax<br />Effective Tax Rate ~ 55% on active income<br />Can’t use losses against Can Co. <br />Easier in operating or obtaining ownership of interests<br />
  11. 11. Deductibility Issues<br />Development Costs<br />Normally deducted immediately<br />AMT 10 year write-off<br />AMT reduction of tax benefits by 30% of mineral exploration and development costs (separate from 10 year write off calc)<br />AMT 5 year write-off of excess denied amount<br />Can elect to amortize:<br />Mines – over 10 years<br />Oil and Gas – over 5 years<br />Depletion<br />Cost v. percentage depletion (greater of two)<br />Various limits on oil & gas, iron, and coal<br />Percentage depletion goes beyond basis<br />11<br />
  12. 12. 12<br />Passive Interests in U.S. Mineral Properties<br />Mineral Deposits, Timber and Crops<br />Canadian Corporation Owning Interest Directly<br />Should elect to be treated as effectively connected income<br />Avoids 30% withholding on the gross proceeds<br />File W-8ECI with purchasers<br />No FIRPTA unless sale of or residual interest<br />File U.S. foreign corporation return (Form 1120-F)<br />Will pay U.S. tax on “effectively connected income”<br />Effective Tax Rate ~ 62% on income<br />
  13. 13. 13<br />Passive Interests in U.S. Mineral Properties<br />Mineral Deposits, Timber and Crops<br />Canadian Corporation Owning Interest Through U.S. Corporation<br />No FIRPTA issues or other foreign withholding issues<br />File U.S. corporation return (Form 1120) annually<br />Will pay U.S. tax on net income<br />Repatriated dividends subject to 5% withholding tax<br />Effective Tax Rate ~ 55% on passive income<br />
  14. 14. 14<br />Passive Interests in U.S. Mineral Properties<br />Example # 2 (Permit Transfer)<br />CANADA<br />100%<br />USA<br />Parent Can Co.<br />Can Co.<br />Coal Permits<br />
  15. 15. 15<br />Passive Interests in U.S. Mineral Properties<br />Example # 2 (Permit Transfer) - Continued<br />CANADA<br />100%<br />100 %<br />USA<br />Parent Can Co.<br />Can Co..<br />U.S. Co.<br />Coal Permits<br />
  16. 16. 16<br />Passive Interests in U.S. Mineral Properties<br />Example # 3 (Who Owns The Interest?)<br />CANADA<br />100% ?<br />USA<br />?<br />Can Co..<br />U.S. Co.<br />U.S. <br />Oil Interest<br />
  17. 17. 17<br />Exploration of U.S. Mineral Properties<br />Exploration Expenditures<br />Unless elected otherwise, exploration expenses are capitalized and depreciable upon reaching development (except acquisition and lease costs)<br />Election under IRC §617(a) to expense in current year<br />AMT 10 year write-off<br />AMT reduction of tax benefits by 30% of mineral exploration and development costs (separate from 10 year write off calc)<br />AMT 5 year write-off of excess denied amount<br />
  18. 18. 18<br />Exploration of U.S. Mineral Properties<br />Mineral Deposits, Timber and Crops<br />Canadian Corporation Owning Interest Directly<br />No FIRPTA until sale of interest<br />File U.S. foreign corporation return (Form 1120-F) annually<br />Usually capitalize all costs associated with property<br />Avoid recapture and limitations of net operating losses<br />Will pay U.S. tax on disposition<br />Earnings attributable to “branch” taxed at 5% upon repatriation<br />First $ 500,000 CDN exempt under treaty<br />Other potential exemptions<br />Effective Tax Rate ~ 55% on active income<br />Generally utilize losses against other non-US mineral properties in Can Co.<br />More difficulty isolating Canadian/US risks<br />More cumbersome reinvestments in other U.S. properties<br />
  19. 19. 19<br />Exploration of U.S. Mineral Properties<br />Mineral Deposits, Timber and Crops<br />Canadian Corporation Owning Interest Through U.S. Corporation<br />No FIRPTA issues or other foreign withholding issues<br />File U.S. corporation return (Form 1120) annually<br />Will pay U.S. tax on worldwide income<br />Simpler filing<br />Potential transfer pricing issues<br />Repatriated dividends subject to 5% withholding tax<br />Effective Tax Rate ~ 55% on income<br />Can’t use losses against Can Co. <br />Easier reinvestments in other U.S. properties<br />
  20. 20. 20<br />Exploration of U.S. Mineral Properties<br />Example # 4 (Spin-Off of Successful Find)<br />
  21. 21. 21<br />Exploration of U.S. Mineral Properties<br />Example # 4 (Spin-Off of Successful Find) - Continued<br />
  22. 22. 22<br />State Tax Implications<br />Each U.S. generally has its own taxing authority<br />Generally, if you have in state:<br />Income<br />Property<br />Payroll<br />= TAXABLE IN STATE<br />Potential tax owing even if loss generating from property in state<br />Other excise, use, sales, franchise taxes may exist<br />
  23. 23. 23<br />Deductibility Issues<br />Transfer Pricing<br />Not reasonable, will not deduct<br />Formal study?<br />Cross-Border Lending<br />Is it truly debt or equity?<br />Thin capitalization / character<br />Interest Expense<br />Is it paid or accrued (IRC § 267)?<br />U.S. interest stripping rules (IRC § 163(j))<br />Stock Options<br />Deductibility depends on the option<br />Consequences for the company and the recipient<br />
  24. 24. 24<br />Deductibility Issues - Continued<br /><ul><li>Start Up and Organizational Costs
  25. 25. Generally amortize over 15 years
  26. 26. Depreciation
  27. 27. Normally accelerated v. CCA
  28. 28. Asset by asset detail – NO BUCKETS!
  29. 29. Depreciation is mandatory (not elective)
  30. 30. Can create tax losses overall in U.S.
  31. 31. Can’t assume deductions are the same for tax purposes on both sides!</li></li></ul><li>25<br />Obligation to Report<br />Auditor Materiality<br />Assessment whether company is compliant with annual reporting – accrual or disclosure of potential penalties?<br />FIN 48<br />Assess “material positions” using “more-likely-than-not” threshold<br />Potential IRS disclosure will mirror FIN 48<br />Large companies only<br />Sarbanes-Oxley<br />Potential financial disclosure risks<br />
  32. 32. 26<br />Final Discussion<br />QUESTIONS?<br />

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