End of overseas tax credit may hurt mining, resource sectors

The mining and metals industry hasseen better days. At home and around the world, the sector has lately been in a slump brought on by various factors, including low commodity prices, inflation and the ever-present challenge of finding, hiring and retaining the right people.

Whether digging for nickel in Sudbury or gold in Africa, it's hard to find skilled workers.

And it's going to get harder not just for mining companies but for oil and gas corporations and others in the resourcesector as Ottawa phases out its long-standing overseas employment tax credit(OETC).

The credit once gave a hefty break to Canadian residents who spent at least six consecutive months of the year outside the country working on a contract for a Canadian firm in one of several industries,including natural resources, construction, installation, agriculture, engineering andUnited Nations projects.

It eliminated 80 per cent of income tax on the first $100,000 that employees earned working on those contracts (in salary, wages or other remuneration), an appreciable perk which for many helped offset the drawbacks of living in remote places like Burkina Faso.

Which is exactly why it was introduced in 1979. Ottawa wanted to nudge Canadian companies onto the world stage by making it easier to to recruit talented staff. But it's being phased out. The credit will be worth only 60 per cent for the tax year 2013, 40 per cent for 2014 and so on until, by 2016, it will be just a fond memory.

Added costs

So what's a company to do? Shed the Canadians in favour of cheaperbut sometimes less-reliable foreign workers? Or try to keep them by paying a lot more in compensation, offsetting the loss of the OETC?

Added risk or added expense both unwelcome prospects in a down market.

And what about the roughly 7,000 Canadians who claimed the credit in 2012, whose take-home pay is about to go off a cliff?

• Special report: Mining and energy in the North
• Mining sector faces rising costs, uncertain demand

An analysis from the consulting firmDeloitte warned the costs stemming from the loss of the OETC and Quebec's similar OED "may be substantial and should be taken into account by companies bidding on projects."

Under the full-blown OETC/OED, Deloitte estimated an employee making $100,000 in foreign income paid just $5,600 in tax. Once those credits are gone, the same employee will pay an estimated $31,200.

The problem is "high on the agenda of all resource-sector companies," says Jo-Anne VanStrien, a partner with Ernst & Young Tax Services.

VanStrien predicts the larger companies think Barrick Gold and the like are more likely to be recruiting workers from the global talent pooland thus will be able to adjust to the change with relative ease.

Contracts that were signed prior to March 29, 2012, when the elimination of theOETCwas first announced, are not subject to the gradual phase-out. Those employees will continue to enjoy an 80 per cent break through tax year 2015, but nothing beyond that.

This is good news for many in the mining sector, which tends to have its projects lined up years in advance.

"Those mines or projects were probably already in place,"saidVanStrien.

The change will be felt sooner in sectors with shorter turn-around, like engineering.

VanStriensuspects engineering firms "will likely struggle with this, somewhat."

"It's the nature of their business to be constantly looking for new bids," she said.

Some might choose to end residency

The loss of the creditwill also be hard on smaller mining companies that have until now relied heavily on the OETC to attract Canadians and don't have the resources to effectively recruit from abroad, VanStriensaid.

Companies will have to look at this and not leave it up to the individual to decide how to adjust.- Jo-AnneVanStrien, partner, Ernst & Young

"You want to go with people who know your company's structure, knowyour team, before you send them overseas," said VanStrien.

As for the employees, some might decide it makes more sense to no longer be resident inCanada, owe Ottawa nothing, and instead pay the presumably more modest taxes wherever they happen to be posted. They don't pay much in Panama, for example.

• Why would Canada spy on Brazil mining and energy officials?
• Ring of Fire delay highlights need for mining infrastructure

VanStrien says she got a few phone calls along those lines when the phase-out was first announced. "It comes down to: pay higher taxes or break ties," she said.

"Companies will have to look at this and not leave it up to the individual to decide how to adjust."