The unparalleled natural resources in Canada’s north represent untold opportunities that have permanently placed the region onto the world stage. With levels of mining, exploration, and development already at record levels, and forecast to grow dramatically over the next decade, it is an exciting time to be a part of the northern mining community. At the same time, being part of a global industry requires that business leaders maintain operations that are competitive with companies from all corners of the globe.
As owners and operators deal with the challenges of turbulent commodity markets, shortages of skilled labour, government intervention at multiple levels, and raising capital in a cash restricted environment, the importance of creating and adhering to an effective tax management plan can seem minor by comparison. However, failure to proactively address the myriad of direct and indirect taxes that property owners and corporations are required to comply with can undermine profitability and result in companies incurring unnecessary expenditures. Failure to address these areas also exposes the organization to new risks requiring additional management oversight, which would be mitigated by addressing taxation matters in a timely manner.
The challenges associated with taxation reach beyond the taxpayer. Government has always been tasked with walking the fine line between generating sufficient tax revenues to provide constituents with essential services, while maintaining tax burdens at levels that can be effectively levied without discouraging corporate development. Managing this formula requires constant review and adjustment as demographics and regional commerce change. With the continued expansion of the mining industry, government agencies are faced with their own challenges and dilemmas as they work to maintain and create effective tax policies in a rapidly evolving environment. As a key stakeholder in the northern regions of Canada, the mining industry is drawn into the additional challenge of understanding the implications of taxation, and when necessary, advocating for the changes required to ensure that it remains fair and equitable across all industries.
Property tax provides an example of the potential benefits of implementing a comprehensive tax management plan, and also the risks, which can arise in the absence of one. The taxation of real property has been practised throughout all of recorded history and remains a key source of government revenues. The determination of the basis upon which property taxes are levied is challenging in itself as it must reflect the guidelines enacted by not just one, but multiple offices of government, including provincial or territorial and municipal. The complexity of mining operations creates additional challenges, as interpretation of existing regulations, which by its nature is subjective, often requires ongoing and extensive dialogue between the taxpayer and assessment authority. Despite representing a significant expense item for property owners, property tax is often overlooked and incorrectly addressed as an uncontrollable expense. Authorities have an obligation to implement the relevant legislation to the best of their ability based on available information. This infers an inherent responsibility on the part of the taxpayer to clearly delineate issues relating to the accuracy and completeness of tax calculations, and to identify additional information, which may assist the assessor or official in rendering a more accurate assessment. As a taxpayer, you must be equipped to review tax notices and filings to determine if they are prepared in accordance with, and reflect the intentions of, applicable legislation. Lack of communication with assessors to address appropriate classifications, determine if an item is exempt from taxation, reflect the disposal of assets, or consider the impact of various valuation methodologies can result in overstated property assessments and resulting tax expense.
Of course taxation is not limited to the assessment and levies associated with property ownership, and the scope of factors that tax practitioners must contemplate in the preparation of a tax management plan continues to grow in complexity and depth. In response to government’s efforts to encourage growth through the termination of capital taxes and reductions in corporate income tax rates, alternate methods of generating tax revenues have emerged including an expanded role of transactional and production based taxation. These taxes are unique in that the government has essentially delegated the role of tax collection and remittance into day-to-day commerce. As a result, corporations must have the capacity to deal with the intricate requirements of items such as royalties and commodity taxes, as well as the complexities that surround interactions with government agencies. These complexities continue to increase as the applicable laws evolve in concert with economic drivers. With both corporate tax departments and government offices already running beyond capacity, the risk of inadvertently incurring unnecessary liabilities and compliance related penalties is a very real consideration for all North American taxpayers, including those with operations in Canada’s north.
Tax expense management
While the path of least resistance is to assume that all filings and tax notices are correct and issue payments accordingly, the potential of overstated tax expenses, as well as the corporate obligations regarding accurate filing and compliance, suggest this to be a high-risk approach. Prudent tax management involves the identification of all tax legislation affecting your organization, and ensuring a complete understanding of the responsibilities, rights and recourse available to the company. This allows management to prioritize the various exposures and determine what level of investigation and review each one warrants. There are multiple options available to corporations in undertaking this challenge including retention of assistance from a third party specializing in the particular field of taxation, with many companies opting to supplement internal knowledge bases with external subject matter experts.
The rights of a taxpayer to review, and where appropriate challenge, the basis upon which taxes have been calculated are available for finite periods of time. As such, whether your course of action involves outsourcing your tax advisory requirements or developing the in-house resources, one of the most critical elements of an effective tax management program is the capacity to act proactively.
By Jon d’Easum, senior director operations, Western Canada, DuCharme, McMillen & Associates Canada, Ltd.