EDITORIAL PAGE — Misleading statistics

The legacy of flow-through is still with us. Long after the tax-driven incentive for mineral exploration has fallen out of favor, the statistics it generated are working against the industry’s effort to convince decision makers that it needs more capital.

Flow-through refers to the tax deduction for mineral exploration that companies can pass on, or “flow through,” to individual investors who then apply it against income from any source. Otherwise, that tax deduction could only be used by companies with operating income — something junior companies, by definition, simply don’t have.

Flow-through financings are still used, but today they lack the sweetener that attracted investors in the mid-1980s — the mineral exploration depletion allowance (MEDA). It allowed investors to deduct 133% of the cost of their investment from their income tax.

At the time flow-through became popular, Revenue Canada was getting desperate to increase tax income, so it did away with the scheme’s MEDA portion. Since then, investors willing to fund high-risk exploration have all but disappeared.

Despite its shortcomings, flow-through was an efficient way of directing dollars from private investors into non-urban regions. It has been argued that while Revenue Canada lost by offering the 133% deduction, it gained by collecting personal income tax and corporate tax from the people it put to work in areas like Kirkland Lake, Ont., and by reducing payouts on unemployment insurance and welfare.

Perhaps of greater value is the body of exploration knowledge that was built up with the benefit of flow-through funds. That knowledge may not translate into mineral production for some time, but, like research and development in the manufacturing sector, you have to go down a lot of dead-end paths before you find that yellow-brick road to success.

It is the abuses that people remember, however — the inflated drilling costs, the extravagance in supplying exploration camps on short notice, the rich option payments.

A more subtle effect is the distorted statistical picture of exploration activity from those heady days of 1987-88 when flow-through financing was such a popular vehicle.

Now, when the industry’s advocates try to convince policy-makers how poorly mineral exploration is faring, they use statistics that demonstrate the dramatic decline in exploration over the past few years. In dollar terms, it makes an effective graph showing the drop to an estimated $650 million in 1991 from $1.4 billion spent in 1988.

Using those figures, however, does the industry a disservice. Critics will point out that the 1988 figures were an anomaly, driven by tax breaks. By discrediting that statistical argument, critics throw into question the entire claim that the industry is hurting. But exploration spending is up 1.2% annually since 1969 in constant dollar terms.

It would be more effective to acknowledge the anomaly of flow-through financing and then argue that more exploration is required to maintain ore reserves. A system like flow-through with MEDA, but better regulated, could be used to get investors back into the game.

That’s one way government, without spending a cent, could mobilize some of the capital that is waiting to be put to work and help get this country back on the road to economic recovery.