Flow-Through and METC

Cutting to the core of mineral exploration, Core Matters gives you an inside look at the most important topics in our industry.

Flow-Through and METC

August 1, 2016

Situation
Over the past four to five years the mineral exploration and development industry has experienced a severe downturn, resulting in the loss of many jobs in the sector and the financing opportunities necessary to ensure a healthy stream of exploration projects that ultimately support a robust mining industry for future generations of Canadians. During the downturn, over a period from 2011 through 2015, equity capital raised by TSX Venture Exchange listed companies declined more than 80 per cent from $5.9 billion to $1.1 billion. While there are preliminary signs of a progressive easing as shown by recent financings ($1.3 billion from January through July 2016 on the TSX Venture Exchange – more than all of 2015), AME member companies are acutely aware that the industry is global in nature and that government incentives for mineral exploration are an important competitive advantage for a jurisdiction. Incentives aimed at mineral exploration in BC and Canada help keep investment dollars at home and support the steady generation of future Canadian mineral exploration and mining projects. But incentives must never be taken for granted. The federal government is currently reviewing such incentives in its wide-ranging review of all tax measures. This includes flow-through share financings (FTS) and the 15 per cent Mineral Exploration Tax Credit (METC), available to individuals who invest in principal business corporations that incur eligible Canadian Exploration Expenses (CEE).

Supporting FTS and METC means keeping investment dollars in Canada, and with it the jobs and economic activity in areas that vitally need them. Removing these important tax incentives at a time when the industry is still recovering from arguably the worst down cycle in decades could have a crippling effect on the recovery of the industry as a whole.

What’s really happening
In its 2016 budget, the Government of Canada announced it would be undertaking a review of tax measures. The METC, for example, has been in place since October 2000 and has been renewed annually, with support from all political parties. The Liberal Party of Canada pledged to retain METC as part of its election campaign. According to the federal government, in 2013, the last year for which figures are available, METC tax incentives have benefited 68,000 individuals and provided investment dollars for 500 corporations to carry out exploration activities across Canada (see here for details). The cost of the tax credit is estimated at $125 million for 2016, and peaked at $430 million in 2011. The cost is offset by the benefit of industry’s annual investment in exploration and deposit appraisal work across Canada – often in remote areas such as British Columbia’s Golden Triangle and central interior – and ultimately the major socio-economic benefits (job creation, municipal, provincial and federal taxes, and economic growth through use of support services and local vendors) provided through the development of new Canadian mines, for which robust and ongoing investment in mineral exploration is a critical prerequisite.

The Prospectors & Developers Association of Canada (PDAC) estimates that flow-through funding accounted for 72 per cent of all exploration financing in Canada during the 2012-2014 period. And Finance Canada has estimated that every dollar of flow-through financing generates $2.60 of exploration-related expenditures in Canada. Removing FTS as a viable funding mechanism could drive those exploration investment dollars into jurisdictions other than Canada, and seriously cripple Canada’s, and British Columbia’s, mineral exploration and mining industries in the future.

What action AME is taking

In its 2016 budget, the Government of Canada announced it would be undertaking a review of tax measures. The METC, for example, has been in place since October 2000 and has been renewed annually, with support from all political parties. The Liberal Party of Canada pledged to retain METC as part of its election campaign. According to the federal government, in 2013, the last year for which figures are available, METC tax incentives have benefited 68,000 individuals and provided investment dollars for 500 corporations to carry out exploration activities across Canada (see here for details). The cost of the tax credit is estimated at $125 million for 2016, and peaked at $430 million in 2011. The cost is offset by the benefit of industry’s annual investment in exploration and deposit appraisal work across Canada – often in remote areas such as British Columbia’s Golden Triangle and central interior – and ultimately the major socio-economic benefits (job creation, municipal, provincial and federal taxes, and economic growth through use of support services and local vendors) provided through the development of new Canadian mines, for which robust and ongoing investment in mineral exploration is a critical prerequisite.

The Prospectors & Developers Association of Canada (PDAC) estimates that flow-through funding accounted for 72 per cent of all exploration financing in Canada during the 2012-2014 period. And Finance Canada has estimated that every dollar of flow-through financing generates $2.60 of exploration-related expenditures in Canada. Removing FTS as a viable funding mechanism could drive those exploration investment dollars into jurisdictions other than Canada, and seriously cripple Canada’s, and British Columbia’s, mineral exploration and mining industries in the future.

Action that you or your organization can take
Preserve Canada’s competitive tax incentives that support mineral exploration and development across the country. Let your views on incentives be heard through a survey being conducted by PDAC – click here for the link. The information you provide will be included in AME and PDAC’s submission to Finance Canada. Your input will play a critical role in assisting the panel of experts engaged by government to undertake the review of tax measures and in understanding the value of flow-through shares and the METC to the mineral exploration and development industry, and to all Canadians.