is required to recapture, as ordinary 
income, depletion and other deductions 
taken with respect to the property.

A foreign taxpayer will also be taxable 
on the disposition of a US real property 
interest (USRPI), even if the taxpayer is 
not engaged in a US trade or business. 
A USRPI is defined to include an 
interest in real property, including an 
interest in a mine, well, or other natural 
deposits located the United States or 
the Virgin Islands, as well as certain US 
corporations whose value is primarily 
derived from other USRPI. For this 
purpose, the term “real property” 
includes land and unsevered natural 
products of the land, improvements, and 
personal property associated with the 
use of real property.

If a foreign person disposes of a USRPI, 
a purchaser should withhold tax at the 
rate of 10% on the amount realized on 
the disposition. The amount realized is 
the sum of the cash paid or to be paid, 
the fair market value of other property 
transferred or to be transferred, and 
the outstanding amount of any liability 
assumed by the purchaser.

To equalize the tax treatment of the 
foreign person disposing of a USRPI 
with the treatment of a US person, the 
US tax law provides that the amount 
withheld cannot exceed the vendor’s 
maximum tax liability on the sale of the 
USRPI.The maximum tax liability is 
the amount realized minus the adjusted 
basis of the property multiplied by the 
vendor’s maximum tax rate applicable 
to long-term capital gains. 

For example, if the sales price is 
US$1 million for USRPI and the basis 
is $1.5 million, then the potential 
withholding tax should be US$100,000. 
The vendor will then be required to file 
a US income tax return and calculate 

actual US income tax on the amount 
of the loss from the disposition. Under 
these facts, the vendor should receive 
a refund of the tax withheld, because 
the amount of tax withheld ($100,000) is 
higher than the maximum tax liability. 

PFIC Regime

US investors in Canadian-based mining 
companies may be subject to taxation 
under the passive foreign investment 
company (PFIC) rules. A foreign 
corporation is a PFIC if 75% or more 
of its gross income for a taxable year 
is passive (the 75% passive-income 
test) or at least 50% of the average 
fair market value of the assets held by 
the corporation during a taxable year 
consists of passive assets (the 50% 
passive asset test).

Generally, passive income includes 
dividends, interest, rents and royalties, 
annuities, net gains from transactions 
in any commodities, and net gains on 
the sale of property producing passive 
income; passive assets are defined as 
assets that produce, or are held for the 
production of, passive income.

Where a US person invests in a PFIC, 
the US investor will not be entitled to 
the long-term capital gains tax rate on 
any gain resulting from the sale of the 
shares of the PFIC (a maximum of 20% 
for tax years after 2012 if the shares are 
held for more than one year). In addition, 
the individual US investor will not be 
entitled to the qualified dividend tax rate 
(also a maximum of 20% for tax years 
after 2012). Instead, any gain is allocated 
over the period throughout which the 
PFIC shares were held, and is taxed at 
the highest rate applicable to ordinary 
income in the year (39.6% for tax years 
after 2012), plus an interest charge. 
The items of income noted above may 

also be subject to the 3.8% unearned 
income Medicare contribution tax if 
earned by certain individual taxpayers 
and trusts whose adjusted gross income 
(as modified) exceeds a specified 
threshold amount. 

The punitive provisions of the PFIC 
rules – in general, the allocation of gains 
and certain distributions to various 
years during the holding period, and the 
taxation of those gains and distributions 
as ordinary income at the highest rates 
plus interest – do not apply to a taxpayer 
that makes the qualifying electing fund 
(QEF) election. In general, the company 
must have been a QEF with respect 
to the taxpayer for each taxable year 
(since 1986) in which the company was 
a PFIC and that included any part of the 
taxpayer’s holding period. 

As a result of the QEF election, 
the US shareholder must include 
his or her share of ordinary income 
of the QEF in income annually (as 
ordinary income) – whether or not 
distributed – as well as net capital gains 
(as long-term capital gains). This election 
is shareholder-specific and does not 
affect foreign (non-US) shareholders.

Another available option is to make 
the mark-to-market election. This 
requires that the shareholder mark 
the foreign stock to market each year. 
The shareholder must include in gross 
income (as ordinary income) the excess, 
if any, of the fair market value of the 
stock at the end of the year over its 
adjusted basis. In addition, in contrast to 
the QEF election, any gain on the sale of 
the stock is treated as ordinary income.

Though the IRS has not yet finalized 
PFIC reporting requirements, it is 
expected that all US persons who hold 
an interest in a PFIC will be required to 
report such interest in the future. 

© 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms 
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

 

Overview of the US Mining Tax Environment 

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