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MINING-SPECIFIC TAX PROVISIONS Investment Tax Credit for Exploration In Canada 
Introduction Mining is an integral part of Canada's technology-driven, knowledge-based economy. The Government of Canada wants to ensure that this resource sector prospers and grows to its full potential. Exploration is vital to ensuring that Canada remains a global leader in mining, and that this sector continues to contribute to the prosperity of Canadian communities in the 21st century. This is why the Government of Canada introduced the 15 percent federal exploration tax credit for flow-through share investors in its October 2000 Economic Statement. This measure will stimulate investment in mineral exploration throughout Canada. Canada already leads the world in mine financing and in the application of innovative, high-tech exploration techniques. Our expertise, whether it's developing new technologies or providing a wide range of equipment and services, is second to none. I am convinced that, by working together, we will continue to show that we are the world's smartest mining nation - the most high-tech, the most environmentally friendly, the most socially responsible, the most productive and competitive - a living model of successful sustainable development. Program's Purpose and Scope In the Economic Statement and Budget Update of October 18, 2000, the Honourable Paul Martin, Minister of Finance, announced a temporary, 15% investment tax credit for investors in flow-through shares of mineral exploration companies. This Investment Tax Credit for Exploration (ITCE) is a measure designed to assist junior mining companies in raising new equity through the issuance of flow-through shares. This additional financing should help exploration companies to maintain, or increase, their level of exploration activities in Canada. The ITCE applies to eligible exploration expenses incurred after October 17, 2000, and before January 1, 2004. Following the budget of February 2003, the program has been extended until December 31, 2004. The program applies only to preliminary mineral exploration activities conducted from or above ground. It does not apply to oil and gas, coal, bituminous sands or oil shale; expenses incurred to explore underground, or for the purpose of bringing a mine into production, are also excluded. The information included below is based on Finance Canada publications up to December 21, 2000, and is intended as a general guide only. In cases of doubt the wording of the Finance Canada publications takes precedence. A tax credit of 15% of eligible expenses can be applied against a taxpayer's federal income tax otherwise payable for the taxation year during which the investment is made. The ITCE is a non-refundable tax credit that can be carried back three years and carried forward ten years. A taxpayer claiming the ITCE will also be allowed to claim the normal 100% Canadian Exploration Expense (CEE) deduction, which applies for both federal and provincial/territorial income tax purposes. Use of the ITCE will reduce the taxpayer's Cumulative Canadian Exploration Expense account. Taxpayers residing in provinces/territories that provide additional exploration incentives are allowed to claim them in combination with the ITCE, but the use of any tax credit offered by provinces/territories will reduce the amount of expenses eligible for the ITCE and the amount of deductible CEE. Who qualifies for the tax credit? Individuals (other than a trust) who are deemed to incur eligible exploration expenses, either individually or through a partnership, pursuant to a flow-through share agreement with a "principal-business corporation," are eligible for the credit. Principal-business corporations, for these purposes, are corporations whose principal business is exploration, mining and mineral processing. Which exploration expenses are eligible? Eligible expenses for the purposes of the ITCE are specifically defined as "flow-through mining expenditures" (FTME). Technically, FTME are restricted to the portion of a Canadian Exploration Expense that is described in paragraph (f) of its definition, in subsection 66.1(6) of the federal Income Tax Act (ITA), and that meet additional criteria referred to in subparagraph 16(d) of the Notice of Ways and Means Motion in the October 2000 Economic Statement and Budget Update, and in the December 21, 2000, Finance Canada news release. In general terms, FTME must be incurred:
Can Canadian Exploration Expenses that do not qualify as FTME still be renounced to flow-through share investors? The rules related to eligible exploration expenses for flow-through shares have not been changed. All Canadian Exploration Expenses (CEE) that are described in paragraphs (f) and (g) of subsection 66.1(6) of the ITA, which include underground and "pre-production development expenses," can still be renounced to flow-through share investors. However, only the portion of the expenses that meets the requirements of the FTME is eligible for the ITCE. The rules that specify the time periods during which CEE related to flow-through shares must be incurred apply to the ITCE. Does this mean that corporations carrying out exploration will have to keep track of the different types of exploration and of where they conduct exploration work? The ITCE is only available for expenses related to exploration carried out from or above the surface of the earth. However, a corporation, in the course of its exploration program, may also incur expenses that qualify only for the Canadian Exploration Expense deduction. Therefore, the onus will be on the corporation to correctly identify and renounce the different categories of exploration expenses for federal income tax purposes. The corporation should keep proper records documenting the expenses that are eligible to be renounced and that qualify for the ITCE. What are the advantages for the individual taxpayer of investing in flow-through shares that involve expenses eligible for the ITCE? Because the federal investment incentive is delivered in the form of a tax credit, its value is the same for all individual investors, irrespective of their marginal federal income tax rates. However, a large portion of federal flow-through share incentives is still delivered in the form of an income tax deduction (as a Canadian Exploration Expense), the value of which varies with a taxpayer's marginal tax rate. Due to the variability of provincial/territorial incentives for flow-through shares, the after-tax situation of a taxpayer will also depend on his/her province or territory of residence. The figure below illustrates the average after-tax cost of a flow-through share investment for individual taxpayers facing the average top marginal tax rate under specific assumptions. The underlying calculations are for illustrative purposes only and may not reflect the particular circumstances of any specific taxpayer. The ITCE program benefits are contingent on the particular conditions of the flow-through share agreement. Due to the complex nature of the income tax rules applying to flow-through shares, qualified professional advice should be sought to help structure such agreements.
Further information is available from: Natural Resources Canada
Excerpt from a letter from Natural Resources Canada Minister Ralph Goodale to the PDAC, dated October 18, 2000: "I am writing about some good news from the Government of Canada for the Canadian mineral exploration industry. The industry is struggling with a serious situation brought on by various factors - including low metal prices and stiff competition for risk capital against the information technology industry - which have converged to cause a deep downward cycle in the level of exploration activity. To help remedy the situation, the Prospectors and Developers Association of Canada (PDAC), on behalf of the junior exploration industry in Canada, has been asking for a national tax-based incentive program to help make flow-through shares more attractive to potential investors. At the most recent (September) meeting of Canadian Mines Ministers, the specific PDAC proposal was given detailed consideration. While several jurisdictions expressed reservations about that proposal, all jurisdictions agreed that an effective solution must be found. As promised, the Government of Canada has consulted extensively with industry and community stakeholders and with provincial and territorial governments as to the best way of stimulating more exploration activity and triggering better economic growth and job creation in resource-dependent rural and northern communities across Canada. In his Economic Statement on October 18, 2000, the Honourable Paul Martin, Minister of Finance, announced a temporary 15 percent income tax credit that will be available only to individual investors who incur, either directly or through a partnership, specified exploration expenses pursuant to a flow-through share agreement. The specified expenses are grassroots exploration expenses that are incurred after October 17, 2000, and before 2004 and are conducted from or above surface, which is the type of activity that has been the hardest hit. Provinces are invited to complement this new federal exploration tax credit with their own tax credit at the level they consider appropriate to meet the specific needs of their industry. In combination with the actual 100 percent Canadian exploration expense deduction, the new tax credit will provide net federal tax relief of nearly 40 percent of the cost of exploration (for those taxed at the highest marginal rate). This substantial level of assistance should help preserve jobs, protect world-class Canadian expertise in a high-tech activity and stimulate grassroots exploration that industry needs for mining community growth across Canada. Attached is the exact wording of Minister Martin's "Ways and Means Motion" relating to the ITCE program, together with information that illustrates the benefits provided by this new federal approach, and a comparison to the original Focussed Flow-Through Share proposal that was discussed at the recent Mines Ministers' meeting."
Excerpt from Finance Canada Backgrounder to News Release 00-101 December 21, 2000, clarifying the Definition of Elegible Expenses
Flow-Through Share Investment Tax Credit The Department of Finance has received submissions from the public relating to the category of expenses eligible for the 15 percent flow-through share investment tax credit announced in the October 2000 Economic Statement and Budget Update. In response to submissions received, the Government intends to broaden the category of expenses falling within the definition of "flow-through mining expenditure" in the following two ways:
For this purpose, it is proposed that "specified sampling" be the collecting and testing of samples in respect of a mineral resource to the extent that
The Government intends to include these changes in the Bill that is to be introduced in the House of Commons in early 2001. Executive Summary of the 2002 Preliminary Evaluation Report The most recent downturn in exploration expenditures in Canada, which began in 1997, led to a significant reduction in the country’s reserves of gold and base metals with consequent mine closures and job losses. In response to this difficult situation, affected stakeholders (mining industry, communities, provinces/territories) embarked on a broadly based campaign for a federal tax incentive that culminated in the October 2000 introduction of the 15% federal Investment Tax Credit for Exploration (ITCE). Provincial tax credits that were harmonized were introduced during the following two years. The underlying causes for the decline in exploration and mining activity are global in extent and beyond the control of any single government. Metal prices remain at levels well below those of 1996, before the current downturn began, and hopes of economic recovery in major consuming nations appear to be repeatedly set back by events such as the September 2001 terrorist attack, lack of investor confidence in the equity markets as a result of suspect disclosure practices of major public companies, conflict in the Middle East, and faltering national economies. While the Canadian exploration sector must continue to contend with these external factors, Canadian governments have an interest in determining whether or not, and to what extent, recently adopted measures have helped the industry withstand these difficult times. This preliminary report was therefore prepared for Canada’s Mines Ministers who, at their 2001 Conference in Québec City, recognized the need to evaluate the ITCE and other related tax credits. The working group that was struck from members of the Intergovermental Working Group on the Mineral Industry (IGWG) determined that there are three immediately apparent ways of measuring the success of the federal ITCE and provincial/territorial tax credits. The first is to measure the amount of money raised for flow-through shares (FTS), where the investor receives the ITCE; the second is to measure the evolution of various exploration activity indicators; and the third is to measure the number of discoveries of new mineral deposits that were funded by ITCE-eligible expenditures. In measuring the amount of money raised using the ITCE, the study group was faced with significant difficulties in obtaining reliable and timely data. Aggregate corporate income tax data on FTS sales, renunciations and ITCE eligible expenditures from the Canada Customs and Revenue Agency will provide useful information when they become available in a revised and more comprehensive format for the full period since the introduction of the ITCE. In the meantime, the trends from the data related to intentions to raise FTS funds do show a rising interest in that financing mechanism since the inception of the ITCE. Currently, the most useful data are a compilation of information available from the System for Electronic Document Analysis and Retrieval (SEDAR) database, which is maintained by the stock exchanges. These data and the data available from Gamah International, which also incorporate information from company press releases, show that while the ITCE has not raised funds to the extent ($300 million per year) anticipated by the Prospectors and Developers Association of Canada (PDAC), it has been a lifeline for junior mining companies. FTS financings raised approximately $110 million in 2001, the only full year since the program inception. The federal-provincial/territorial survey of mineral exploration, deposit appraisal and mine complex development expenditures provides various breakdowns of exploration spending, including one by junior and senior companies. This survey shows that junior exploration spending has risen steadily since the introduction of the ITCE. Assuming that FTS financings are concentrated in the hands of junior companies and that many FTS financings would involve the use of the ITCE, this rising trend points to the ITCE and related credits achieving their goal of supporting the junior exploration sector and encouraging more grass-roots exploration. A separate working group, led by the PDAC and including Natural Resources Canada and Queen’s University, has analyzed the discoveries made since 1970 and concluded that, in general, the discovery rate per dollar expended has declined over time, although the rate of discovery of new mineralization per dollar spent is higher now than it was during the boom years of FTS and the Mining Exploration Depletion Allowance (MEDA) from 1986 to 1988. On an international basis, Canada has managed to increase its share of exploration funded by the worldwide exploration budgets of larger mining companies and is well placed to supply mineral commodities to the world markets as economic circumstances improve. In conclusion, the ITCE has been reasonably successful in maintaining access to exploration financing for junior mining companies in the current difficult economic and financial times. But due to the timing of the introduction of harmonized provincial tax credits and the time it took for industry and investors to adjust to the program, the uptake on the ITCE has gone through a slow start and the program is just beginning to show signs of realizing its anticipated potential (about $96 million has been raised by FTS financings in 2002 to the end of July). Looking forward, industry has requested an extension to the program and that consideration be given to making certain adjustments to the tax credit mechanism. The working group is of the opinion that the ITCE should be given more time to meet its objectives and yield meaningful results for the industry and the communities that rely on mining as their principal source of income and employment. Accordingly, the working group is recommending that:
Link to the complete report in PDF format.
You can access all forms prescribed by the Canada Revenue Agency (CRA) by pressing this link to CRA page on the flow-through share program. The Prospectors and Developers Association of Canada (PDAC) site contains information about specific topics:
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