Low royalty rates, lax oversight mean N.W.T.'s missing out on mining revenues: report

The government of the Northwest Territories is missing out on mining revenues because of a 'charitable' royalty and tax structure, according to report commissioned by the government.

'The N.W.T. lags behind other Canadian jurisdictions in exploration investment,' says report

Heavy haulers and excavators work in the Diavik diamond mine pit on Lac de Gras, approximately 300 kilometres northeast of Yellowknife. Diavik mine owner Rio Tinto paid zero royalties in mine production to the N.W.T. government in 2015, according to a recent report. (Adrian Wyld/The Canadian Press)

The Northwest Territories is essentially giving away its mineral resources for little financial return compared to some other jurisdictions in the world, according to a recent report released by the Department of Industry, Tourism and Investment.

The N.W.T. has what the Northwest Territories Mineral Sector Review and Benchmarking report describes as one of the most "charitable fiscal regimes" in the world for mining companies.

The independent report, paid for by the territorial government, estimates mining companies here pay an effective tax rate of — at most — between 20 and 30 per cent, similar to the rest of Canada. The effective tax rate is defined as revenue paid to government from royalties and taxes combined. In South Africa, the take is 30 to 35 per cent, while in Western Australia it can reach as high as 80 per cent.

The government of the N.W.T. collected approximately $83 million in royalties and tax revenue from mining operations in 2016, or less than five per cent of the territory's 2017 $1.86 billion budget.

According to the report, mining giant Rio Tinto paid zero royalties to the territorial government from its Diavik diamond mine operation in 2015, and half of the $63.2 million in income taxes it did pay appear to have been kept by the federal government. (Rio Tinto has since disputed that claim, saying it in fact paid just over $38 million in royalties in 2015.) 

The territory, according to the report, does not determine royalties based on a mining company's profits but based on a complicated formula that determines royalties owed based on the value of mineral production after costs, something easily manipulated to minimize the amount owed in royalties.

This is typical for Canada, the report says, but unusual for the rest of the world.

Further weakening the government's share of resource revenue is the fact that royalty payments are only required once a mining company reaches a certain level of commercial production, and even then, according to the report, the territory's royalty regime is weakly enforced.

Few employees

Meanwhile, mining in the North employs just seven per cent of the territory's workforce, according to the report  — fewer than 1,700 people — despite being one of the biggest industries in the territory and making up 25 per cent of the territory's GDP, and 50 per cent of all exports to other provinces and countries.

Part of the problem identified by the report is the high cost of mineral exploration and mine development in the North, which gives companies leverage to negotiate royalty agreements, and deters further exploration in the North.

"The N.W.T. lags behind other Canadian jurisdictions in exploration investment, including other jurisdictions with underdeveloped transportation systems such as Nunavut and the Yukon," writes the report's author Andrew Bauer, a Montreal based natural resource consultant.

"Whereas exploration investment has grown in most other jurisdictions over the last decade, it has remained steady at approximately $100 million per year in the N.W.T."

A question of balancing taxation with motivation to invest

Paul Zimnisky, a diamond industry analyst, disagrees with some aspects of the report.

"Given the complexity of taxes, royalties and supplementary benefits to a government from a resource project, it's quite difficult to simply make an apples-to-apples comparison," Zimnisky stated in an email to CBC News.

"Generally speaking, in a capitalist economy governments will try to extract as much value from a resource as possible while still allowing for the residual economics of a project to offer private investment incentive."

Zimnisky also points to the high cost of mining in the North and suspects the government here is getting a fair shake on resource revenue.

"In the case of diamonds in the N.W.T., you can argue that the government's share of income from projects is quite fair," he said.

"With regard to taxes and royalties, there is a fine line between extracting as much revenue for the government as possible while still allowing the economics of the project to be great enough to justify continued operation."

Zimnisky believes there is not much room, if there is any room at all, to increase taxes or royalties on existing mining operations in the N.W.T.

Report released after public engagement, MLA

Frame Lake MLA Kevin O'Reilly brought attention to the report during the Oct. 18 sitting of the Legislative Assembly.

O'Reilly criticised the Department of Industry, Tourism and Investment, for releasing the report after holding public engagement sessions on the Mineral Resources Act.

The territorial government says that legislation will allow the territory to better manage mining resources in the North. 

"The late release of Mr. Bauer's study throws into doubt how [the department] can have a meaningful and informed Mineral Resources Act delivered in 2018," said O'Reilly. 

"What other studies or reviews has [the department] done on the subject and not released?"

A government spokesperson clarified Tuesday that the act is set to be debated in 2019, not 2018, and noted that stakeholder engagement sessions on the act continue, inviting people to submit comments through their public engagement website.

On Oct. 18, Minister Wally Schumann told the legislature his department was conducting further research and planning more public engagements on the Mineral Resource Act.

"I will have to have a check with the department on what we can all release here that is public information," said Schumann. "We can share that with all people in the Northwest Territories."

Schumann said he would "put out a document on what [the territorial government has] heard" and promised that there will be a lot of time for residents to have their say on the Act.


  • This story was updated to note that Rio Tinto is disputing claims made in the report that it paid no royalties in 2015.
    Nov 01, 2017 9:33 AM CT
  • This story had been updated to clarify when the Mineral Resources Act is expected to be debated and how the public can engage in its creation.
    Oct 31, 2017 11:05 AM CT