The recently announced changes to the Alternative Minimum Tax (AMT) calculation effective in 2024 have sent shockwaves through the finance industry, raising concerns about their impact on junior finance and philanthropic activities. These measures, intended to ensure a minimum level of tax payment, may have unintended consequences that undermine investment, charitable giving, and the mineral exploration sector. It is crucial to understand the potentially far-reaching implications of these changes and their negative impact on various sectors of the economy.
One of the major consequences of the new AMT rules is the significant reduction in the volume of flow-through share finance activity. A very small group of Canadian high net worth taxpayers – less than 2,000 – provide about three quarters of all flow-through share exploration capital driving critical mineral and metals exploration. The current AMT rules already limit this investment incentive. The 2024 implementation is expected to result in a one-third reduction in flow-through exploration financing representing at least $250 million in lost exploration jobs in northern and remote communities with particular impact on indigenous communities.
As these rules reduce the availability of credits, fewer individuals will be able to invest, leading to issuers having to reduce their premiums, resulting in increased dilution. This contraction of flow-through share activity threatens to hamper the growth and development of junior finance, a vital sector that drives exploration, innovation and economic progress.
Furthermore, these changes have dire consequences for philanthropy and foreign investment. Those familiar with the flow-through share regime know that about 75% of all flow-through share financing is through the operation of what is now known as Charitable Flow-Through in which Canadian taxpayers interested in giving more to charity buy flow-through shares which are immediately donated and then sold by charities to global end buyers. This approach results in a double win for Canada, increased philanthropy, and northern job creation. Most of the critical mineral end buyers over the past year were Australian. The new AMT rules will go a long way in killing what was a very successful low-cost government initiative.
The AMT calculation penalizes individuals who selflessly choose to give away their money by subjecting them to taxation on their donations. This disincentive to give away money will undoubtedly impact the ability of charitable organizations to carry out their essential work and positively impact society.
The mineral exploration sector, too, will be hit hard by the changes to the AMT calculation. The flow-through share format has become Canada’s preferred method for funding exploration activities, accounting for about $1 billion in activity last year. However, the new rules will limit the ability of individuals to invest in flow-through shares, resulting in a contraction of available funds. This, in turn, will hinder the exploration sector’s ability to access capital and carry out vital mineral exploration projects, which are crucial for economic growth and resource development.
Fluctuations in prices and demand can substantially impact investment decisions, making it essential to provide the best possible tax incentives during cooperative market conditions. While gold and other traditional resources may have lost their lustre recently, the focus has shifted towards critical minerals such as lithium, which hold immense promise for the future.
It is worth noting that the exploration sector, particularly in critical minerals, faces vulnerability to fast-money investors seeking quick returns. When marijuana investment was in vogue the junior resource sector saw high-risk investment migrate away from junior exploration. Currently, the rise of artificial intelligence investments emphasizes the need for a robust tax incentive framework to ensure the continued growth and stability of the critical mineral sector funding Canadian jobs.
The availability of funds and the number of participants are key factors influencing the sector’s success. While a small group of individuals has been instrumental in driving investments, there is a pressing need to broaden the base of participants to ensure sustained growth. The recent influx of funds from Australia highlights the international interest in Canadian critical mineral resources. However, Canada must improve its regulatory framework to attract and retain investments, as the country’s potential may remain untapped if progress is hindered.
While it is essential to strike a balance and risk-adjust certain activities, tax credits have proven to be a powerful tool in stimulating investment.
The Critical Mineral Tax Credit was introduced in the federal March 2022 budget. Coincidently the world came to understand that critical minerals are essential and many critical minerals including lithium were at all time commodity highs. The combination of the Critical Mineral Tax Credit and the Charity Flow-through structure resulted in over $350 million invested in Canada in the past twelve months. Commodity prices have fallen with the falling pricing resulting in reduced financing activity. The new AMT rules will take the wind out of what was a great incentive. Comparatively, if grants were used instead of tax credits, progress would have been sluggish, plagued by endless deliberations and bureaucratic processes.
The impact of these changes extends beyond a specific group; it affects all stakeholders. Ultimately, everybody loses in this scenario, and the consequences are far-reaching.
The new AMT measures threaten to derail the progress made in the junior finance sector, limit funding for crucial exploration projects, and discourage individuals from supporting charitable causes. These unintended consequences must be taken seriously, and policymakers need to reconsider the impact of these measures on the overall economy. Striking a balance between tax fairness and supporting economic growth is essential.
Not all of us have a finance degree. What is “junior finance?”