TORONTO (miningweekly.com) – Proponents of Canada’s long-standing flow-through share tax incentive programme, which is available to mineral exploration companies to raise funds to look for new deposits, say that increased benefits could help resuscitate the domestic industry, even though signs are pointing towards a possible trough being reached in what has been one of the worst commodity price downturns in decades.

“Our number one priority, as we have been doing for the last decade now, is to get in front of the new Liberal government, to understand what their priorities are and to explain the value of the flow-through share programme to ensure that the framework is maintained – that’s the critical starting point. We’ve done the cost-benefit analysis, and we need to make sure that everybody understands the importance of the flow-through regime,” PearTree Securities president Trent Mell told Mining Weekly Online in an interview.

The flow-through structure has been entrenched in the Canadian tax code since the late 1980s, but had existed in Canada in other iterations since the 1950s.

Under Canada’s Income Tax Act, there were two types of flow-through share investments – ‘regular,’ which entailed a 100% deduction write-off for exploration expenses (net of federal and provincial credits) and ‘super,’ which was similar, but added an additional 15% federal tax credit for grassroots exploration, as well as provincial and territorial deductions and tax credits.

Canadian rules required a company that was renouncing, or flowing through, an exploration expense to an investor, to get out in the field and spend those exploration dollars within 24 months and, in certain circumstances, forcing exploration companies to get to work in the quickest timeframe.

LIFELINE
Canada’s TSX and TSX-V stock exchanges listed stocks of close to 60% of the world’s publicly traded mining companies, accounting for more than half of the world’s equity financing for mining and mineral exploration. Flow-through shares played an important countercyclical role during the recent downturn.

As overall financing levels for exploration fell, the proportion of financing using flow-through shares went up. Flow-through deals accounted for 72% of all financing raised for exploration-stage activities from 2012 to 2014, highlighting its importance as an incentive in attracting capital to the riskiest stage of the mining cycle.

Mell stressed that it was now more important than ever to support the junior exploration industry with sound policy making, and to throw a lifeline to the foundering domestic mining industry. “After 40 years we’ve had many mineral discoveries, thousands of jobs and millions of expenditures enabled through flow-through shares,” he said.

The flow-through share programme had been so successful, in fact, that Australia and other developing nations such as South Africa were looking at copying the Canadian regime and trying to roll out something similar, in support of their struggling mining industries.

PearTree echoed the Prospectors & Developers Association of Canada’s (PDAC’s) position calling on the federal government to increase the Mineral Exploration Tax Credit to 30% for three years. According to the PDAC, financing for exploration had fallen more than 90% since 2007, underlining the importance of policy tools that encouraged investment in exploration and ensured that the money raised was spent in Canada.

The PDAC had recently lobbied the federal government during its nationwide prebudget consultations to take action and improve the flow of capital to the junior exploration sector, as well as to address the infrastructure deficit in northern and remote Canada.

PearTree had also been actively lobbying the Ontario government to increase the Ontario flow-through Investment Tax Credit from the current 5% to 20%. PearTree's view was that such an increase would facilitate Ontario’s competitive edge, enable increased exploration and drive jobs in the north. To that end, Mell noted that PearTree's recommendation for the increase had even been included in the Ontario Chamber of Commerce’s ‘Emerging Stronger Report’ – a five-year agenda aimed at spurring growth and prosperity in Ontario.

“Look, the industry is on its knees. [Flow-through shares are] still the lifeblood of activity in the north of Canada. This is the time, frankly, to double down and invest to get the job done,” Mell asserted.

SOUND POLICY
While the minerals sector is a key driver of the Canadian economy, it currently dealt with challenges that threatened its ability to continue to be a source of economic growth. The industry was in the midst of a prolonged downturn in exploration financing that was having a significant impact on financing available for the junior exploration sector.

Mell pointed out that there was no denying that government was experiencing the same strain on its balance sheets as the miners were, which, in turn, encouraged provincial governments to listen. However, it is the people in treasury that need the convincing.

“To go from commitment to tax breaks is often a multiyear effort, but I’m hopeful that we’ll have some traction in Ontario this year,” he said.

When flow-through shares were first introduced, the premise was that the retail investors at the time were asked to take on higher risk/higher reward investment opportunities to fund early-stage exploration and processing projects. It was introduced to attract investors and could now play an even more important role than ever, to attract investors back to a market where investors had been scared away by the worst downturn Mell had seen in his professional life. He noted that the downturn had caused several brokerages to shut down across Canada.

Mell explained that it was sometimes difficult to see just how valuable the flow-through share policy’s contributions to the economy were. The industry supported a significant number of highly skilled jobs and it was one of the biggest employers of First Nations “If you look at the social benefits of the industry, it’s a remarkable contribution. We need government policy that’s going to support and facilitate that.

“There are many challenges facing the mining industry, not the least of which are arduous permitting requirements and dealing with First Nations impact-benefit negotiations without a federal framework in place. For all that we contribute, we can benefit from better leadership on all government levels, to streamline the exploration to permitting process,” stated Mell.