Mining Investments Into The United States

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


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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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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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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Example # 2 (Permit Transfer)

CANADA

100%

USA

Can Co.

Parent Can Co.

Coal Permits

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Example # 2 (Permit Transfer) - Continued

CANADA

100%

100 %

USA

Can Co..

Parent Can Co.

Coal Permits

U.S. Co.

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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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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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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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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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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?

Documents

Mining Investments Into The United States