Ottawa may scrap flow-through shares

Members of Quebec’s mining community are biting their nails over the uncertain future of flow-through share financing for mineral exploration. Next spring, the popular tax shelter may be scrapped at the federal level and the Quebec government may eventually follow suit, Quebec Mines Minister Raymond Savoie told The Northern Miner.

“The writing on the wall is not good for flow-through,” he said, citing a demand for immediate tax revenues to offset the federal and provincial deficits. The attempt to align Canada’s corporate tax structure with that of the U.S., where virtually no tax shelters exist, may also signal the end of the program he warned.

“It’s going to be very difficult maintaining flow-through share structures,” Mr Savoie said. “The effect of this on small mining companies in Quebec and elsewhere will be very damaging. But one of my major positions has been to protect these fiscal structures and I’m very keen to ensure their continuity.”

A spokesman for federal mines minister Gerald Merrithew says the minister’s office is unaware of any such plans to end flow-through tax provisions.

“Mr Merrithew is very strongly in favor of the concept of flow- through shares,” the spokesman said.

In an earlier interview with The Northern Miner, Mr Merrithew said: “I think (Finance Minister) Michael Wilson understands the importance of flow- through shares to the industry.”

Representatives from the federal finance department who normally act as spokesmen for the department were not available for comment and did not return several calls placed to the department by The Northern Miner. The finance department would have the final say in any proposed changes to the flow- through share mechanism.

“If flow-through is cut, then the future of Canadian mining would be cut,” said Christian Derosier, president of the Quebec Prospectors Association. “The industry would return to how it was in 1970; only the major companies would be able to raise and spend money for exploration. Junior companies would go bankrupt and disappear because funds would not be available.”

A $96,500-study being carried out by the QPA is one way of combatting moves to dismantle the flow-through tax shelter. Preliminary results from that study show the Quebec government gets $3 back for every $1 it gives up in tax revenue. For example, increased employment resulting from higher activity in the mineral exploration sector results in greater sales tax revenue and greater personal income tax revenue.

The Quebec government will pay for half of the study Mr Savoie announced before about 350 delegates here at the QPA’s 12th annual convention.

The other half of the study’s cost will be jointly covered by municipal associations in the Abitibi region of Quebec (about $12,000), the Prospectors and Developers Association of Canada ($10,000), the Canadian Diamond Drillers Association ($5,000), and the Quebec Metal Mining Association ($5,000). QPA will cover the balance (about $16,000).

Mr Derosier said the study will provide, for the first time, reliable statistics as to the effectiveness of flow-through financing. Specifically, it will determine the amount of flow-through shares raised and spent in Quebec and Ontario between 1980, when the concept was introduced, and 1985.

In 1985 alone about $350 million was raised by Quebec mining companies using flow-through and other methods of financing.

The study will also investigate the amount of commission collected by brokers as well as the number of jobs that have been created and maintained as a result of the program. The study should be completed by the end of October.

Flow-through shares provide investors with considerable tax breaks for investing in junior mining companies which perform exploration work. The federal government allows tax writeoffs of up to 133% for every dollar invested while the Quebec government allows up to an additional 166% on top of that. In Quebec, taxpayers in the highest tax bracket can receive tax deductions of more than 90 cents on every dollar they invest in mineral exploration.

The QPA is lobbying to have flow-through extended at both the federal and Quebec level. In Quebec the additional tax deduction expires in December, 1987, though it may be extended to Feb 28, 1988. After that time, the deduction will be abolished — unless it is renegotiated.

“The QPA has heard bad rumors about the future of flow-through,” Mr Derosier said, “and we suspect that they emanated from the federal government. But bad rumors can be reversed if we are able to provide good news — (about flow- through) and a strong lobby.”

Mr Derosier said the QPA will lobby for flow-through funds to be extended to the feasibility study stage, but not to the production stage. Under the current program, funds are cut off after the first ton of ore is extracted and milled for production.

He said the problem with extending the funds to production is that some exploration equipment, such as jumbo drills which may be bought with flow- through funds, can also be used during production.

“There is a large grey zone as to whether it is acceptable to use certain infrastructure for both exploration and production.”

He added that flow-through funds have sometimes been wasted because companies are forced to spend a lot of money on diamond drilling programs within a very limited time span (the money must be spent before Feb. 28). “But this problem could be greatly diminished if companies were able to extend their work over a period of one full year,” he said.

“The extra would allow them to map their properties, carry out geophysical surveys and receive results from the labs.”