Mining Investors and the Tax System

Jamie Kneen

National Program Co-Lead

Many of the junior mining companies creating havoc in communities these days have no intention of developing a mine, and their investors don’t care, but these companies are raising millions in equity to keep their exploration programs going.

This is possible because of two federal programs: Canadian Exploration Expenses and the Super Flow Through Share Program.

Canadian Exploration Expenses (CEE) are expenses incurred for the purpose of determining the existence, location, extent or quantity of a mineral resource, including prospecting, geo-chemical and geophysical surveys, drilling, trenching and preliminary sampling, removing overburden, sinking a mine shaft (pre-production development costs). They do not include costs for environmental assessment or the purchase of mineral claims. Any portion not used in the year the expenditure was incurred can be carried forward indefinitely. This creates a pool of expenditures that can be transferred to subsidiaries and upon sale of the company. The pool of expenses becomes a “Tax Asset”.

Super Flow Through Shares (FTS) Companies are allowed to renounce or flow through CEE expenses to shareholders so that the investor can use them as a tax loss. Believe it or not, some investors need tax losses to avoid paying income tax. Investors get a 100% tax deduction for the money they invested in the shares. In addition, the federal government gives a 15% tax credit to investors under the Program (this is what makes it “Super”).

The ‘super’ flow-through program was introduced in October 2000 as a temporary measure to help moderate the effect of a global downturn in mineral exploration in the 1990s. This tax credit is set to expire in March 2007, and the industry is already lobbying to make it permanent.

There is also a federal 10% Investment Tax Credit to the exploration company for a mineral exploration project on previously undeveloped land.

Super flow-through shares and Investment Tax Credits enrich speculative investors by reducing the after-tax cost of a $1,000 investment in exploration in Canada to as little as $207 in Québec and $333 in BC.

It is important to note that most provinces also have Flow Through Shares and tax incentives for mines in remote areas – in addition to the federal program.

There has also now been a proliferation of limited partnerships of investment dealers who broker the relationship between individual investors who want the tax losses and companies that are willing to give up portions of their CEE tax pool in return for the investment. These companies make anywhere from 20-40% in fees for the transactions: they have their own interest in maintaining the program.

The combined effect of all this is a real upsurge in companies that want to create exploration costs and hype their claims, even when the mine may have no real chance of ever going ahead. Their intention is to mine investors and the tax system, not the land, although exploration also creates substantial environmental damage.

In northern Ontario, seven First Nations have issued mining moratoria to stop the exploration activities of Platinex, Metallex, Superior Diamonds and other mining companies on their traditional territories. They say the companies are infringing their rights and damaging their land. They also say that, until their communities have been able to develop strategic level land use and economic planning, they are not able to benefit from any proposed mining projects. The companies have refused to withdraw, and continue to badger the band councils for access. These companies are all dependent on the Super Flow Through Share program to raise equity.

See Kitchenuhmaykoosib Inninuwug First Nation Says Ontario Mining Act Unconstitutional on our web site for more details.