PDAC 2015: Canadian gov’t extends tax savings for exploration

The federal government is showing support for Canada’s mining industry by extending a tax credit for junior mining companies by another year. 

At the annual Prospectors & Developers Association of Canada (PDAC) convention in Toronto on March 1, Finance Minister Joe Oliver said the government would provide the 15% mineral exploration tax credit (METC) until the end of March 2016.

“During a challenging economy, in the struggle to secure capital, it has helped to keep investment flowing,” Oliver said in his prepared remarks. “And with the credit scheduled to expire at the end of [March], it is still needed to help the industry thrive.” 

Introduced in 2000, the METC helps juniors raise equity through flow-through shares by allowing them to pass on the rebate to investors that buy the shares.

Since 2006, junior exploration firms have raised more than $5.5 billion. In 2013, more than 250 firms issued flow-through shares eligible for the credit, with at least 19,000 investors benefitting. 

While the PDAC has advocated for doubling the METC and a three-year extension to alleviate the pain that juniors are facing in the current bear market, PDAC president Rod Thomas says he understands the government’s finances are constrained. “We expect the federal government to be prudent in terms of its finances, and we’re thankful that they’ve extended that for another year.”

While the credit will provide an incentive for investors to take up junior mining shares, the exploration dollars raised through flow-through shares have declined with falling commodity prices, as companies spend less on exploration. According to a study by PearTree Securities and Deloitte, companies raised $373 million in flow-through funds last year, versus $1 billion in 2011. On a positive note, the amount in 2014 was 6% higher than the $350 million raised in 2013. 

PearTree president Norm Brownstein says that while the METC extension “on its own won’t have a noticeable impact on the size and scope of flow-through financings — which are dictated more by global market trends — it will ensure that the junior exploration sector can continue to function and raise capital.”

Recognizing the slim chances of exploration success, huge capital needs and long time frames before mining firms can become cash flow positive, the government is considering broadening the tax credit to strengthen the industry, which employed more than 380,000 Canadians in 2013. 

Kelly Block, the parliamentary secretary to Natural Resources Minister Greg Rickford, said the government proposes to allow costs associated with environmental studies and community consultations to obtain an exploration permit that is tax deductible, as Canadian exploration expenses (CEE). 

Not all of these activities currently qualify as CEE, but with the proposed changes, “companies can deduct 100% of these costs, or flow them through to shareholders,” Block said at the PDAC. “This will be a real boost to resource companies, improve access to venture capital, promote exploration of Canada’s mineral resources, create jobs, foster long-term growth and prosperity, and ultimately, develop our resources responsibly.”