Editorial Don’t shoot the golden bird, Mr. Wilson

With the next federal budget only a week away and a much- guessed- about tax reform paper expected sometime in the spring, this is an opportune time to reaffirm our concern for the retention of flow-through share financing.

Flow-through is “the engine that is driving the Canadian mining sector,” as mining consultant Edward Thompson said at a recent Toronto seminar on mine financing. The numbers speak for themselves. In 1987 more than $750 million is expected to be raised with flow-through financings, compared to more than $500 million in 1986 and $34 million in 1983 (the year the mineral exploration depletion allowance was introduced). In other words the numbers have been almost doubling on a yearly basis.

Already, more than half of this year’s estimated $750 million has be en filed, according to Robert McLeese, vice-president corporate finance at Midland Doherty. Never in the history of this country have Canadians done their tax-planning this early in the year. Needless to say, this is great for the exploration companies because it gives them 14 months to efficiently spend their funds (previously they were forced to spend them in the last couple of months of the taxation year). Mr Thompson went on to say that, by 1988, Canada will be able to credit some 25 new gold mines to flow-through financings (assuming the current gold price remains around $400 per oz).

The program’s popularity is understandable. The federal government a llows tax writeoffs of up to 133 1/3% for every dollar invested in junior companies which perform exploration work. These days, there aren’t many other situations in which the government allows the investor a writeoff in excess of the amount of capital he puts up.

Clearly, this tax incentive is working like a charm. And federal Fin ance Minister Michael Wilson would be foolish to eliminate, or significantly alter, such an integral and essential part of mine financing. But with U.S.-style tax reform as part of Ottawa’s game plan, the future of flow-through remains uncertain. The finance department has indicated that tax breaks given to some industries, and not to others, are a no-no.

What Ottawa may not realize is that flow-through shares are not a sp ecial tax shelter, as such. They are a mechanism whereby tax rules which are available to senior companies in the industry may also be made available to taxpayers who fund exploration programs that are conducted on a junior company’s properties. In other words the mechanism allows the junior sector to obtain the tax benefits that the senior sector already gets. Paradoxically, then, the current flow-through rules actually contribute to, rather than detract from, neutrality in our tax system. Moreover, the company which issues flow-through shares gives up forever the tax deductions related to the exploration program. In a recent paper, the Prospectors and Develope rs Association of Canada set out its case for the retention of flow-through share rules:

* Flow-through preserves jobs — The exploration business is a labor-intensive business. It’s estimated that 75% of an average exploration program represents labor costs. Based on annual exploration expenses in the neighborhood of $700 million, the exploration industry provides direct jobs for some 20,000 people. The exploration sector also provides an estimated 60,000 jobs indirectly.

* Flow-through creates wealth — During the current, prolonged period of soft base metal prices, the exploration sector has remained healthy and vibrant. The mobilization of risk capital attributable to flow-through shares has led to the discovery of many new mines in Canada, creating new jobs, additional tax revenues and new sources of foreign exchange.

* Flow-through helps prevent economic distortions — A healthy junior exploration sector is important to prevent the concentration of Canada’s exploration industry in a few senior companies. It’s a well established fact that the junior exploration sector is more efficient in terms of mine-finding than the senior sector. Also, flow-through funds are going into depressed areas of the country. The northern and other frontier regions within Canada rely heavily on a healthy exploration industry.

Given the tremendous economic benefits of flow-through, it’s almost impossible to imagine that Mr Wilson would shoot down this golden bird.