Quebec flow-through cut causes mixed reactions

The Quebec government has announced it will be reducing the deduction for investments in mineral exploration through flow- through shares. So far the move to reduce the current 166.6% deduction for investments in mineral exploration through flow- through shares. So far the move to reduce the current 166.6% deduction to 133.3% (the same amount offered federally) has been described as everything from “positive” to “murder.”

The announcement, made last week by Quebec Finance Minister Gerard Levesque, comes less than three months before the next federal budget, which is expected to determine the future of flow- through and other tax deductions.

Quebec Mines Minister Raymond Savoie, a strong supporter of flow-through, said in a telephone interview that he expects a mixed reaction to the tax change.

“Some people will see the reduction as a serious dent in the flow- through share structure, so I imagine there will be some backlash. But I’ve spoken to several people in the mining industry who don’t think there will be any backlash. I think the truth lies somewhere between those two opinions.”

Christian Derosier, president of the Quebec Prospectors Association, denounced the reduction as “murder” for the mineral exploration industry.

“I feel exploration will now diminish sharply in Quebec and elsewhere in Canada,” he told The Northern Miner. “I don’t know why Mr Levesque made this move. Over the past six months they (the Quebec government) indicated to the QPA that they would make no move on flow-through until the federal government decided on its future. They are now opening the door for (federal Finance Minister) Michael Wilson to lower the deduction even further.” The federal government now allows tax writeoffs of up to $1.33 for every do llar invested in junior mining companies. The Quebec government has been allowing up to an additional $1.66 for every dollar spent by Quebecers on exploration companies operating within Quebec. But, under the rule changes, that additional tax benefit will only apply to money invested by Dec 31 and spent by Feb 28 (the extra benefit was not supposed to have expired until December, 1987). Stock dilution

Mr Derosier said federal civil servants recently told the QPA there is a possibility that Ottawa will reduce the writeoff to 100% from 133.3%. He said this will have the effect of diluting junior mining stock so much that those companies will have difficulty raising cash. “It will kill entrepreneurship,” he warned, “because no one will want to start new companies.” (The QPA had wanted the Quebec government to lower the writeoff only on advanced projects while leaving grassroots projects unaffected).

Mr Savoie said the decision to reduce the writeoff was made on the basis that the price of gold ($393 US at presstime) is expected to remain strong and that exploration programs have become well- established in Quebec as a result of flow-through deals. He added that Mr Levesque has said provisions will be made for the reorganization of mineral exploration in Quebec. A program similar to the Ontario Mineral Exploration Program (OMEP) may be imminent, he said.

Mr Savoie insisted that the reduction is, in no way, a response to statements made recently by Mr Wilson that some of Canada’s favorite tax breaks could vanish as a result of tax reform. “But,” he added, “now that Quebec is at the same level as the other provinces, perhaps Ottawa will be more inclined to sign some kind of agreement with the province whereby the flow-through share structure could be maintained so that people could continue to build on it.” Possible agreement

He said he is examining the possibilty of reaching an agreement with Ottawa whereby flow-through would be maintained for a fixed period of time. “Three years instead of five, for example.” (Originally the program in Quebec was to have lasted from 1982 to 1987).

Although Mr Savoie said he has no indications that flow-through in Quebec will be further reduced, he nevertheless insisted:

“There is major tax reform in the air. If you look at what has happened in the U.S. (where major tax reform was passed earlier this year), you’ll agree that it would be very difficult for Ottawa to do otherwise. As a result I fear that several tax deductions may be put aside or seriously reduced. However, the reduction in Quebec to $1.33 will certainly improve our ability to negotiate with Ottawa.”

Edward Thompson, a Toronto- based mining consultant, agrees that the tax change will have a positive effect on Mr Wilson’s decision as to whether flow-through should be maintained, eliminated or altered.

“Quebec’s reducing its benefit should help him (Mr Wilson) maintain the current federal set-up (of 133.3%) because it won’t be as big a drain on his treasury,” he said. `A rich writeoff’

“One of Ottawa’s concerns was that there was a lot of money going into Quebec and that it wasn’t being project- or merit-driven; it was just being tax-driven. People were spending money simply because it was a very rich writeoff. They weren’t looking at the merits of a project. But with a single depletion, the money should be better spent.”

Lionel Kilburn, president of the Prospectors and Developers Association, says the industry would rather have the additional writeoff than not ha ve it at all. But he insisted the reduction will not have a severe effect on exploration. (The PDA is lobbying for the maintenance of the $1.33 writeoff).

He said people should realize that flow-through is not a tax shelter but, rather, an integral and essential part of mine financing. In other words, the tax writeoff is simply transfered from the mining company to the investor.

“The equivalent of flow-through shares was first put into effect in 1953 when depletion was created,” he said. “The mining corporations have used it for the past 30 years, and it was only in 1983 that it was opened up for ordinary citizens to use.”

“History has proven that flow- through works,” he said. “Whether or not we can convince Mr Wilson to keep it remains to be seen.”