Turning ore into rock

"A study recently completed by the Prospectors and Developers Association, assisted by the author and computerized mine models he developed, presents a strong case that present tax rules severely handicap the junior exploration company relative to the established producer. This month, Tax Notes briefly summarizes the highlights of the study and some of the Association's ideas which came out of the study.IntroductionIn the case of any industry, a particular project or investment will generally generate a more attractive after-tax rate of return to a tax paying entity than to a non-tax paying entity: the ability to shelter current taxable income with tax deductions related to the project or investment can present a definite advantage as compared to shielding taxable income in the future with the same deductions. But, this advantage is probably seen nowhere more clearly than in the mining industry where the tax rules allow for substantial up-front write-off's. Studies show that the junior mining company which is earning no taxable income currently can be seriously disadvantaged, compared to the mining company which is currently generating taxable profit and paying taxes. This is particularly disturbing when one considers the importance of the junior segment of the mining industry. One might well ask where the equity is, in a tax system which causes the junior company to look at a deposit and see rock in the ground, when at the same time the deposit represents a viable mine to an operating company. This inequity and the importance of the junior mining company have been recognized to some extent in the income tax legislation. In recent years, the expansion of the rules for deducting certain earned depletion allowances against any source of income, and changes to improve the flow-through share rules, have gone part way in helping to put the junior on a more equal footing with the operating company. But it is questionable whether or not these helpful changes to the tax rules have done enough to alleviate the apparent inequities in the income tax legislation."