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Quebec to serve as canary in the tax mine for Ontario

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Over the next year, Ontario will mull how to extract more revenue from its natural resources. The deficit-plagued government will be pleased to see how high its neighbour just set the taxation bar.

Quebec's proposed new mining-tax regime will make sure that everyone extracting minerals in the province pays some tax, even if they don't turn a profit. (The proposed rate is a royalty of 1 per cent on the first $80-million of ore extracted, 4 per cent on everything beyond that.) It will also raise the mining tax on the most profitable mines. The current rate of 16 per cent will still hold, but only on the first 35 per cent of profit margins; the tax rate increases to 22 per cent on the profit-margin portion from 35 to 50 per cent, and 28 per cent on any profits above a 50-per-cent margin.

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Quebec was quick to say that even with the increases, it would still extract less from miners less than, say, Australia. It was less quick to point out that it is already one of the most tax-heavy mining regimes among Canadian provinces. Once you lump in federal and Quebec general corporate taxes, mines in the province are looking at about a 40-per-cent total tax rate.

And what is the revenue gain from this crackdown on mining companies who are avoiding taxes? Based on the province's own forecasts, a modest $50-million in fiscal 2015, the first full year of the new plan, rising to likely about $100-million by 2020. For a province with a budget of $73-billion this fiscal year, that's not much.

At the same time, Quebec is dangling a carrot in front of mining companies: Process your minerals in Quebec and you to get relief from the mining tax for up to 75 per cent of your profits. The question is, will the miners take a bite? Or will they simply look elsewhere?

That was absolutely the Quebec government's fear; the proposed tax changes are drastically watered down from what the Parti Québécois had talked about before last year's provincial election that sent it into power. Weaker world prices for metals caused it to rethink the more draconian measures it originally had in mind, which might have priced some mining projects out of the market.

Still, by comparison, Ontario must be looking pretty good to miners right now. Ontario has the lowest mining tax burden in the country – a flat 10 per cent. Its overall tax hit on miners, including federal and provincial corporate taxes, is barely over 30 per cent. The Ontario government would like to change that as it seeks revenue growth, but resisted doing so in last week's budget – saying instead that it would continue to review its resource tax structure.

No doubt it was happy to wait for Quebec to tip its hand. Now it will get a chance to gauge industry reaction – without having to stick its neck out first. Quebec just made itself Ontario's guinea pig.

David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe.

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