06/26/2011 01:28 EDT | Updated 08/26/2011 05:12 EDT

Potash Corp Sale To Billiton May Have Been Nixed By Threat Of Lost Saskatchewan Taxes


THE CANADIAN PRESS -- OTTAWA - The prospect of the taxman being short-changed was on the minds of federal officials during BHP Billiton's unsuccessful bid to acquire Canadian-owned Potash Corp (TSX:POT), federal documents show.

The federal government has said very little publicly about the specific reasons for blocking the takeover by the Australian mining giant last year. Then industry minister Tony Clement indicated the deal would not be of net benefit to Canada.

Behind the scenes, federal bureaucrats warned that allowing the acquisition could result in the loss of "important" government revenue, according to documents obtained by The Canadian Press.

"The potential effects of an acquisition of PotashCorp by BHP Billiton on government revenues are unpredictable," said a federal memo prepared at the request of the deputy minister of Natural Resources, Serge Dupont, "to provide information on the royalty regime in place in Saskatchewan."

"The potash royalty system is totally different from, and more complex than, any other mineral royalty regime in place in Canada," reads the undated memo.

The documents don't clarify whether the revenues being discussed were federal or provincial.

Saskatchewan Premier Brad Wall, who waged a high-profile campaign to block the deal, estimated the province would lose between $3 billion and $6 billion in revenue over the course of a decade if PotashCorp were sold.

Ottawa would also lose money from taxation if the deal went through, he said in a speech outlining his opposition to the sale.

"We believe there is a significant risk to net loss to revenue for the governments of Saskatchewan and Canada," he said in October 2010.

BHP went to great lengths after it first announced its takeover bid last August to assure the federal government that the province of Saskatchewan would continue to receive the same amount of tax revenue if the sale went through, but the documents suggest federal officials were not satisfied.

BHP would have been able to write off its capital expenditures from another potash project it was developing in Saskatchewan, known as the Jansen mine, against the profits made by PotashCorp.

This would have resulted in the federal government losing money from the corporate income tax it collects from profits on natural resource development.

"If the takeover entails some expenses that are deductible from corporate income tax base then that will affect both the federal and provincial corporate tax," said Robin Boadway, professor of economics at Queen's University.

The potential consequences for general tax revenue were also apparent to the federal government.

"Revenues from the potash royalty are important: they represent 35 per cent of all non-fuel mineral royalties collected in Canada from 2005 to 2008," the documents read. "Significant capital investment can reduce royalty payments otherwise due and postpone payments by several years."

Paul Duchesne, spokesman for Natural Resources, declined comment on the matter, saying that all information regarding the sale of PotashCorp is protected under the Investment Canada Act.

Energy and Resources Minister Bill Boyd of Saskatchewan requested a meeting in late October with the natural resources minister at the time, Christian Paradis, to outline "significant concerns" from the province regarding the deal, internal emails show.

Boyd travelled to Ottawa in late October to express the province's position, said Bob Ellis, a spokesman for Saskatchewan Energy and Resources. They did not discuss the implications for federal tax revenue, however.

"There are obviously some implications for the federal government in terms of potential loss of income tax but what we did was focus our analysis on impacts on the province," said Ellis.

Senior commodity analysts within the federal department also forwarded and boldfaced portions of newspaper articles to one another in which BHP officials were quoted as saying the deal would not affect the province's tax revenues.

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