Tax Disputes in the Mining Industry: Tax Credit Eligibility Related to CEO Salaries and Other Executives

Executive Summary 

• Eastmain believed its CEO’s salary qualified as a “Canadian Exploration and Development Overhead Expenses” and deducted the same.    

• Revenu Québec (“RQ”) denied Eastmain’s 2007 to 2010 “Credit Relating to Mining or Other Resources” (the “Resource Credits”) claim under Québec’s Taxation Act (the “Act”).¹ RQ held that Eastmain did not qualify for the Resource Credits because its expenses did not “all or substantially all” relate to exploration activities. This case revolves around the interpretation of “substantially all” as it applies to eligible expenses for Resource Credits. 

• The Quebec Superior Court ruled that RQ was wrong and the CEO salary that Eastmain claimed did, in fact and law, qualify as an eligible expense.  

• The Court also clarified that the “all or substantially all” test should not be interpreted strictly as a mathematical formula, but rather, should consider the circumstances and context of each case.

Background to the Reassessment in Ressources Eastmain 

Eastmain, a junior mining company focused entirely on mineral exploration and development, claimed Resource Credits for a portion of Dr. Robinson’s salary. Dr. Robinson was Eastamin’s CEO and Chief Geologist. The Act allows mining companies to claim the Resource Credit to offset expenses that are “all or substantially all” related to “exploration activities”, as defined in the Act. 

RQ, relying on its administrative guideline that “substantially all” refers to 90% or more, denied the Resource Credits. RQ concluded that Dr. Robinson did not devote “all or substantially all of his time” to exploration activities, based on the amount of his travel expenses, the presence of a large team of geologists and project directors, and the fact Eastmain only claimed a portion of Dr. Robinson’s salary expense. Additionally, RQ relied on Dr. Robinson’s informal statement in a public interview where he mentioned spending only 50% of his time on technical aspects, with the rest divided between promotion and administrative tasks (i.e., non-exploration activities). 

Eastmain appealed, requesting that the Court allow the full amount of Dr. Robinson’s salary as eligible for the Resource Credits. The requested amount included both the portion claimed in the 2007 to 2010 tax returns and the unclaimed remainder, arguing that they initially underclaimed the expenses eligible for the Resource Credit. 

Eastmain argued that although some of Dr. Robinson’s time was spent on administration and promotion, most of his time was spent on monitoring exploration, compiling data, and analyzing collected samples.

The Provincial Court’s Findings in Ressources Eastmain 

The Court of Québec rejected RQ’s interpretation that “substantially all” strictly meant 90% or more. Since the term “all or substantially all” is not defined in the Act, Justice Fournier drew from the Tax Court of Canada’s case law, which consistently held that “substantially all” cannot be confined to a strict mathematical formula. Its interpretation must be elastic and account for the circumstances and context in which it is applied.

Justice Fournier preferred and relied on Eastmain’s evidence, specifically a report using a cost accounting method allocating Dr. Robinson’s salary according to his projects and tasks. The report, imperfectly, estimated that Dr. Robinson spent approximately 75% of his time on exploration activities. Justice Fournier concluded that this report alone, was sufficient to satisfy the “substantially all” test, entitling Eastmain to the Resource Credits. 

However, after hearing Dr. Robinson’s testimony (among others), Justice Fournier further confirmed that he believed it was even more clear that Dr. Robinson’s duties “almost entirely” related to exploration activities. 

Finally, Justice Fournier determined that despite the eligibility of Dr. Robinson’s salary expense, Eastmain was not entitled to the unclaimed portion of Dr. Robinson’s salary. Justice Fournier found that the deadline for filing the prescribed form claiming the additional credits for each year, had passed, and there was no legislative recourse for the Minister to extend the deadline or waive the filing requirement.  

As a result, Justice Fournier allowed Eastmain’s appeal, in part, with costs.