Royalty rates affect investment and competitiveness

Stewart Burnett
Northern News Services
Published Monday, February 23, 2015

NORTHWEST TERRITORIES
Resource revenues are $41 million below expectations in the 2014-2015 territorial government budget.

Greg Perdue, vice president and general manager of Buffalo Air Express, and Peter Gillingham, manager of charters and logistics with Buffalo Airways, are bringing cargo freight delivery to the Kitikmeot region. They're committed to making the process as simple as possible. - Stewart Burnett/NNSL Photo

This is because before devolution day on April 1 specific information about the mines was unavailable for GNWT forecasts, explained Glen Burns, director of corporate affairs with the territorial government.

"Following (that date), information was made available and current forecasts are based on models that reflect current mine plans and knowledge about company inventories," said Burns.

"Both the 2014-15 and 2015-16 resource revenue forecasts are lower than the five-year $120 million average used at the time of the 2014-15 budget, and the average of the five-year forecast has dropped from $120 million to $109 million."

The GNWT's estimated $121.73 million in resource revenues for 2014-15 was reduced to $80.28 million in its new budget. The estimated $53.12 million in corporate income tax was also reduced to $29.02 million.

For 2015-16, the government estimates $40.64 million in corporate income tax and $81.22 million in resource revenue.

Resource revenues consist of royalties, licences and rental fees from mineral, oil and gas sources, plus any Norman Wells royalties.

Burns said the transition from devolution has been seamless from the industry point of view and resource revenue numbers haven't changed in its wake.

Understanding royalties

Tom Hoefer, executive director of the NWT Chamber of Mines, explained that royalties are extra taxes charged against resource developers over and above the other taxes the projects already pay, such as corporate taxes, income taxes, payroll taxes, fuel taxes, property taxes and bridge tolls.

Royalties in the NWT are paid on profits only. An unprofitable mine would therefore pay no royalties. Hoefer said there have been years in the past with zero royalty payments when the mines were unprofitable.

"All mines pay the same rate up to a certain level of profit," said Hoefer. "Beyond that, if you are a very profitable mine, you pay a higher rate."

Calibre of mineral deposit and cost of mining are two things that contribute to profitability.

"Royalty rates contribute to investment attractiveness, and government wants to be competitive if they want to attract investment," said Hoefer. "Some governments have killed investment by raising royalties and other taxes at the wrong time."

According to a 2008 study by the Mining Association of Canada and Aboriginal Affairs and Northern Development Canada, NWT and Nunavut royalty rates are competitive internationally, said Hoefer.

"However, it went on to say that given the increasing demands for new payments and costs related to aboriginal impact and benefit agreements, consideration should be given to allowing them to be factored into reducing royalty rates."