By: Ron Bernbaum LL.B, Founder & CEO, PearTree Canada
TAX INCENTIVES WORK SUBJECT TO ONE MAJOR LIMITER THAT REQUIRES LEGISLATIVE CHANGE TO ENSURE A HIGHER LIKELIHOOD OF SUCCESS OF THIS ESSENTIAL PROGRAM
As most readers of this article will know, on April 7, 2022 the federal government introduced a 30 per cent Critical Mineral Exploration Tax Credit (CMETC) for exploration expenditures renounced to flow-through share investors with respect to fifteen specified minerals, including lithium and copper. As we approach the one-year mark since the introduction of this tax credit we wanted to offer our thoughts on what is going well, how its impact is being limited, and how the credit could be further enhanced to support Canada’s critical mineral objectives.
Immediately upon announcement of the critical mineral credit the public markets and global investors responded. PearTree is just one market participant. From April 7 to Dec 31 we closed twelve financings for $80M through our charity platform which saw most all equity – the back end – coming from global (non-Canadian) investors.
What was not obvious at the outset is what the CMETC giveth the Alternative Minimum Tax (AMT) taketh away.
By way of background, the AMT is a feature of the Income Tax Act which is designed to ensure that all taxpayers remit a minimum amount of tax relative to income in any one year, even though a taxpayer may have participated in tax incentive transactions such as Flow- Through Share subscriptions which could otherwise reduce one’s taxable income to nil.
For example, assume that an Ontario taxpayer would have paid $115,000 in tax but purchased flow-through shares resulting in the minimum tax payable under AMT calculation of $100,000. The deductibility / recognition of the federal investment tax credits – whether the 15 per cent METCor the 30 pe cent CMETC is limited to the difference between taxes otherwise owing of $115,000 and the AMT calculation of $100,000. If, in coming to the result above, the taxpayer had purchased $100,000 of flow-through shares funding precious metal exploration – for example gold, attracting the 15 per cent METC credit then the full $15,000 is deductible as a full credit in the year. If the investor had purchased $100,000 of flow-through shares funding critical mineral exploration, for example lithium resulting in a 30 per cent ($30,000 credit) then the tax payer would only be able to claim $15,000 in the current year and have to carry forward half of the value of the credit.
While the calculation isn’t as simple as presented, in this example, in order to take full advantage of the 30 per cent critical mineral credit an investor will subscribe for $50,000
in shares funding critical minerals rather than funding $100,000. All investors in flow-through shares are high-net- worth individuals whose tax professionals will invariably
run an AMT calculation. In these circumstances the result is
a significant reduction in participation resulting in issuers funding critical minerals need to find double the number of investors compared to issuers exploring for precious metals. While premiums are higher for critical mineral exploration the absolute amounts that may be raised is limited. This early glitch can be easily rectified by a formulaic amendment to the Income Tax Act. The result in the example above is that the AMT tax threshold including the full use of the CMETC is reduced from $100,000 to $85,000.
Our recent submission to the federal budget consultation made the case to equalize the impact of Alternative Minimum Tax (AMT) with respect investments in flow-through shares which are subject to the new CMETC to mirror that of the existing METC, along with several other suggestions to expand flow-through opportunities. These recommendations include expanding the list of critical minerals eligible for
the CMETC and expanding eligible Canadian Exploration Expenses (CEE) to include expenses such as metallurgical test work, geotechnical evaluations, environmental baseline studies, Indigenous and stakeholder engagement, and more.
PearTree will continue to advocate with the industry and welcomes the opportunity to work with issuers in this pivotal moment. For those interested in a broader appreciation of these issues, and future updates please visit our blog PearTree Perspective at www.peartreecanada.com.
On request we will be pleased to provide copies of our Budget Submissions to the Ministries of Finance. Please contact Alanna Clark, VP Government Relations at [email protected]