When it comes to tax and junior mining, there have always been a few hold-your-breath moments.
The first is at the Prospectors and Developers Association of Canada (PDAC) convention every March in Toronto. We congregate at the largest mining conference in the world, nervously packing a reception hall to hear from the finance minister on whether the Mineral Exploration Tax Credit (METC) will be extended.
Fortunately, in 2018, the METC was extended for five years – the first multi-year renewal since the policy was created in 2000. But prior to that, we were on a razor’s edge every year, waiting to hear the fate of a tax policy that has been so crucial to Canadian mining.
The extension is announced, followed by an exhale and collective round of applause.
Similarly, the fate of flow-through shares has been equally uncertain. In April, prior to the federal budget, those of us in the tax world wonder – will the government continue this all-important policy? Will it be watered down by increasing the capital gain inclusion rate?
Key funding for junior exploration
Flow-through shares have been around since 1954, offering 100% tax deduction for high-taxed Canadians who purchase them. Meanwhile, in May 2006, our firm WCPD Inc. (Wealth, Creation, Preservation & Donation) made financial services history when one of our clients participated in the first flow-through share donation structure without paying a capital gain.
Once flow-through shares are purchased by our clients, they don’t hold them for long—often less than a minute. The buyer can then sell their shares, at a discount, to a third party, or liquidity provider, thus eliminating any stock market risk for the investor or donor.
You can also donate the shares to a registered charity. The charity then sells the shares, at the same discounted price, to the liquidity providers. Liquidity providers are usually expert mining institutional investors with a long-term investment horizon, which is a perfect fit for junior flow-through issuers.
Meanwhile, the liquidity provider takes on the stock risk for the standard four-month private placement hold period. For most of our clients, this is a key benefit — no stock market risk.
Together, these tax policies allow our clients, on average, to give up to three times more to charity, at no additional cost due to the tax efficiency.
Some of our clients keep a portion of the cash from the liquidity provider sale to make a positive investment return via tax savings.
The key component here is having tax to pay. Our clients, who come from across Canada, must make a minimum of $250,000 per year, or have a significant capital gain.
The numbers speak for themselves – as an industry, this policy has generated billions in financing for Canadian junior mining and sustained hundreds of thousands of jobs. Put simply, flow-through shares have played a significant role in the growth of Canada’s mining industry.
As a cherry on top, policy has also helped create billions more in donations for charities.
And yet, year after year, we held our breath on whether this policy would continue – and then exhaled. Afterwards, I often took staff out for drinks to celebrate.
However, this anxious environment could become a thing of the past.
Critical minerals incentive
The Critical Mineral Exploration Tax Credit (CMETC), announced in the April 2022 budget, has been a breath of fresh air, in many ways.
Exploration involving critical minerals, such as copper, nickel, lithium and cobalt, will now kick out a 30% tax credit (equivalent to a 60% tax deduction), on top of the existing deductions.
In our view, the government has made a firm statement – Canada will be a world leader in critical minerals, so we can be at the forefront of the future green economy.
The opportunity for public support for mining has never been stronger. It cuts right to the core of our national security, whereby Canada and its allies can rely on themselves, rather than less friendly nations (such as China and Russia) for our critical minerals.
“Critical minerals present a generational opportunity for Canada in many areas: exploration, extraction, processing, downstream product manufacturing and recycling,” said Natural Resources minister Jonathan Wilkinson last December. “This federal government is committed to seizing this opportunity in a way that benefits every region across the country.”
Perhaps, we may not have to hold our breath any longer? But as the old saying goes, the devil is in the details.
Policies are only the beginning. Together, as stakeholders, we must collaborate and communicate like never before to ensure Canada reaches this lofty goal.
Jeff Killeen, director of policy and programs at PDAC, points to polymetallic deposits as one area of concern. What if a junior mining company seeking cobalt raises millions of dollars in exploration capital, using these tax incentives, only to find a high concentration of gold?
Will the company, and perhaps dozens, if not hundreds of Canadian taxpayers, be re-assessed?
“There should be no backtrack,” Killeen explains. “It is fairly clear in my mind that it should rely on geologists and experts to make the best attestation based on merit. Perhaps it could affect future raises on that mine, but the company and taxpayers should not be penalized.”
It’s a scenario that may not have come up yet, but surely could down the road.
Information sharing, Killeen argues, should be a major source of focus going forward. And that begins, he says, through an open and transparent dialogue with the Canada Revenue Agency (CRA).
Too often, he explains, the CRA has significant turnover. Auditors come in that have little understanding or experience with the mining industry. This situation leads to confusion, delays and misunderstandings.
“Let’s not make it so complex and difficult to actually achieve the spirit of why CMETC was actually implemented,” says Phontinie Koutsavlis, vice-president of economic affairs and climate change at the Mining Association of Canada (MAC).
“I think the message is – keep it as simple as possible for investors, to grow exploration, and to have capital go into projects for critical minerals.”
In June, the MAC submitted recommendations to a government critical mineral discussion paper. One of those recommendations, she says, was to create an industry-government working group, to specifically look at operationalization and implementation of the critical mineral strategy.
Killeen couldn’t agree more.
Under the current system, groups such as PDAC and MAC have the opportunity to formally engage CRA and government entities “a couple times per year,” he says, providing short presentations followed by a Q&A.
“But there is not an annual workshop or one-on-one, and that could be something to think about in the future,” he adds, because there is much to discuss.
For example, in June 2022, a strategy was laid out for the protection of 30% of Canada’s land and ocean by 2030. While it’s a noble endeavour, how will this initiative work in concert with the critical mineral strategy?
“Mineral exploration is land access,” Killeen says. “So there needs to be a good channel between these strategies.”
Similarly, Canada’s goal of becoming carbon net-zero by 2050 must also be considered. With most future deposits “in the bush,” mining companies will rely on generators and fossil fuels to operate, he adds.
Where does that fit in?
And then, of course, there is the money – all $3.8 billion of it, committed by the federal government to assist in this strategy.
Koutsavlis points out there has not yet been clear information on how and where that money will be deployed. These details, she explains, have huge implications for the mining industry as a whole.
A seat at the table, and working together in a more direct, collaborative fashion, would make a great deal of sense.
We need to get this right. Canada’s critical mineral strategy is far too important to our future. This is not business as usual. Now is the time for new thinking, and a new spirit of collaboration, so we all can breathe a bit easier.
Peter Nicholson is the president and founder of Wealth, Creation, Preservation and donation (WCPD) Inc. For decades, he has been a recognized leader in Canadian tax assisted investments, with a special focus on charity flow-through shares with an immediate liquidity provider. Through this structure, WCPD has generated more than $1 billion in flow-through financings for junior mining companies and helped raise over $300 million for charities across Canada.