By Rob Cosman, Partner, Jones & Cosman Chartered Professional Accountants
The Mineral Exploration Tax Credit is designed to facilitate the raising of capital for junior mining companies. In its simplest expression, the METC allows individual shareholders to claim a tax credit in their personal income tax returns for expenses incurred by a mining company. As a matter of fiscal policy, the government believes this will encourage Canadian taxpayers to invest in small mining companies and that, in turn, these companies, with proper capitalization, will be successful. In practice, this is achieved using the concept of flow-through shares for eligible expenses.
The METC and Special Tax Incentives
The METC is a 15% nonrefundable tax credit on eligible expenses. It is part of a series of special tax incentives for mining and exploration companies that include:
- The deduction of provincial and territorial mining taxes and royalties
- Special rates of capital cost allowances
- Accelerated rates of capital cost allowances for certain assets
- Canadian Exploration Expense claims
- Canadian Development Expense claims
- Qualifying Environmental Trusts
- Foreign Resource Expense and Foreign Exploration and Development Expense claims
- Various provincial incentives that vary from province to province
Many of these incentives rely on the use of flow-through shares.
A flow-through share is fundamentally a regular share of a corporation. However, if the corporation’s business operations consist mostly of mining and exploration activities, as those defined in the Income Tax Act, then the shares can be designated as flow-through shares. In that case, certain expenses incurred by the company literally flow through to the shareholders. The company has to renounce ever using the expenses as deductions in its own tax returns. Usually, junior mining companies do not need to deduct expenses since they have little or no income, so it makes sense for them to renounce. The expenses are then deemed by the law to have been incurred by the shareholder, not the corporation. On the basis of these expenses, the shareholder can then claim the METC along with other tax advantages.
For individual investors, flow-through shares come with significant tax and financial advantages. First, these investors receive a 100% tax deduction for the amount they invested in the shares plus the 15% METC for the full amount of the eligible expenses allotted to them. Second, if the company is successful, it may see its investment appreciate. However, upon resale of the shares, the calculation of the taxable capital gain takes into account the incentives.
The company that issues the flow-through shares does not have to be Canadian, but the expenses must be incurred in Canada on qualified activities.
The expenses that are eligible for the METC are listed in the Income Tax Act and are called “flow-through mining expenditures.” For example, expenses incurred for the purpose of determining the existence, location, extent, or quality of a mineral resource in Canada, such as expenses for prospecting, geological surveys, or drilling, are flow-through mining expenditures.
Claiming the Credit
Only individuals, whether directly or through a partnership, are eligible to claim the METC on eligible exploration expenses. Trusts, even though they are often considered individuals for the purpose of the Income Tax Act, are not eligible for the METC.
In practice, the METC is grouped with several other investment tax credits on line 412 of the federal income tax return. To calculate it, you must use Form T2038(IND), Investment Tax Credit (Individuals). The mining corporation will issue an information slip to its shareholders indicating the amount of flow-through mining expenditures transferred to each individual shareholder, and that amount is used to proceed with the calculation. The result is then reported on line 412 of your return.
The METC can be carried back for up to three years and forward for up to 20 years. Amounts that are carried back or forward are also calculated using Form T2038, in sections D and E.
Budget 2016 Extension of the Credit
Originally, the METC was intended as a temporary incentive to give the mining industry a short-term boost. As such, it was scheduled to expire on March 31, 2016. However, the METC was extended in the March 2016 budget up to March 31, 2017. The budget documents indicate the government felt it was a challenging time for junior mining companies and that extending the METC would be helpful to them.
As of November 2016, no indication has been given as to whether the next budget, expected in late February or early March 2017, will once again extend the METC or if the tax credit will be allowed to expire.
About Rob Cosman
Rob Cosman, is a Chartered Professional Accountant who runs his own accounting and tax practice with his wife in Toronto, Ontario. Beginning in 2000, Rob’s career spanned over Halifax, Cayman Islands and Toronto. Rob held senior industry positions including CFO roles in public and private industries ranging from telecommunications, retail sales, and consumer packaged goods.
Rob has over 10 years of tax experience and is the author of numerous articles. He has the ability to take complex tax situations, explain them in common sense terms and guide clients to make the best decisions based on their individual situations.