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Thursday, December 08, 2016
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Potash Production Tax System

This summary has been prepared by Saskatchewan Ministry of Energy and Resources to assist users in their understanding of the calculation of potash production taxes. For an exact statement regarding potash production taxes, refer to the Potash Production Tax Schedule of The Mineral Taxation Act, 1983 and The Potash Production Tax Regulations. In the case of conflict between this summary and the provisions of the Act and Regulations, the Act and Regulations will apply.

The potash production tax system was introduced January 1, 1990, and is set out in The Potash Production Tax Schedule of The Mineral Taxation Act,1983 and the Potash Production Tax Regulations. Potash production taxes (base payment and profit tax) apply to all potash that is produced from Saskatchewan lands.

Base Payment

The Base Payment is a monthly payment based on an estimate for the entire year. Producers pay net base payment as follows:

Net Base Payment = Gross Base Payment - [Crown Royalties + Freehold Royalties + Saskatchewan Resource Credit - Excess Deductions] - Tax Credits (prior year)

  1. Gross Payment is 35% of resource profits, subject to minimum and maximum payments:
       Minimum: $11.00 x (total K2O tonnes sold - base payment holiday tonnes)
       Maximum: $12.33 x (total K2O tonnes sold - base payment holiday tonnes)
    A K2O tonne is the quantity of potash that contains the equivalent amount of potassium as one tonne of potassium oxide.
  2. Tonnes produced from approved new capacity that commences on or after January 1, 2005 are not subject to the base payment for ten years.  The increase in capacity must exceed 122,000 K2O tonnes for the new tonnes to be eligible for the base payment holiday.
  3. Crown Royalties are payable under The Subsurface Mineral Regulations, 1960 and are based on the value of potash produced from Crown lands. The effective royalty rate generally ranges from 2.1% to 4.5%, depending on the grade of ore.
  4. The Saskatchewan Resource Credit is 0.75% of the value of sales.
  5. Excess deductions are the amount by which the total of crown and freehold royalties and the Saskatchewan Resource Credit exceed the Gross Base Payment.

Profit Tax

Producers pay profit tax on a quarterly basis, based on an annual estimate.  Producers will pay this tax on profits of individual mines or on the consolidated profits of the producer's Saskatchewan potash operations.

Net Profit Tax = Gross Profit Tax - Base Payment Credits - Tax Credits

Gross Profit Tax is determined by rates which increase with profits per tonne sold, with tax brackets indexed for inflation, as follows:

2010 Brackets
($ profit per K2O tonne sold)

Rate
%

0.00 - 59.55

15%

Over 59.55

35%

Gross Profit Tax for a bracket is calculated by multiplying profit per tonne in the bracket by the producer's sales that are subject to profit tax, times the tax rate for the bracket.

The producer's sales that are subject to profit tax are:

  1. the greater of:
    35% of the producer's sales in the year and 
  2. the lesser of: 
    1. the producer's Adjusted Base Tonnes, and 
    2. the producer's sales in the year

The producer's Base Tonnes are:

  1. For producers who were producing potash in Saskatchewan in 2001 and 2002, the average of the producer's sales in 2001 and 2002.
  2. For producers who were not producing in 2001 and 2002, and
    1. who have not sold 1,333,333 K2O tonnes in the current or any previous year, 75% of the producer's sales in the year; or 
    2. who have sold 1,333,333 K2O tonnes in the current year or a previous year, 1 million K2O tonnes.

The producer's Adjusted Base Tonnes are the producer's Base Tonnes multiplied by the Common Industry Adjustment Factor.  Based on Base Tonnes in the previous year, the Common Industry Adjustment Factor is:

(total industry Base Tonnes of type A above + 35% of the total industry Base Tonnes of type B above)
 (total industry Base Tonnes).

  • Profits = Gross Revenue - Mine Operating Costs - Marketing Costs - Storage Costs - Railcar Costs - Taxes and Assessments - Corporate Allowance - Corporate Office Incentive- Depreciation Allowances;
  • The Corporate Allowance is 2% of gross revenue, in lieu of nondeductible corporate administrative, overhead, financial, and general management expenses;
  • The Corporate Office Incentive is $25,000 for each existing corporate office position in Saskatchewan and $100,000 for new corporate office position, where a new position is counted as an existing position after five years.
  • Companies receive a depreciation rate of 120% in the profit tax calculation on new capital expenditures in excess of 90% of a company's 2002 capital expenditures. Available deductions that are in excess of the amount needed to reduce a producer's income to zero may be carried forward without expiry. A company's base capital expenditures (below 90% of 2002 expenditures) are eligible for depreciation at 35% per annum;
  • Losses may be carried forward for application against future profits for a maximum of five years;
  • Companies receive a credit for base payments against profit tax. The base payment credit is:
    Base Payment Tax Rate ($11.00 to $12.33) x (sales for which the producer is paying both Base Payment and Profit Tax) - 50% of Crown and Freehold Royalties + Excess Deductions from the Base Payment Calculation.

Producers who participate in approved market development or research and development programs may claim a Tax Credit of 40% of the approved expenditure. If there is no profit tax otherwise payable, the Tax Credit may be deducted from the Base Payment in the following year.



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