Ron Bernbaum LL.B Founder & CEO PearTree Canada
As most readers of this article know on April 7, 2022 the federal government introduced a new 30 per cent Critical Mineral Exploration Tax Credit (“CMETC”) for exploration expenditures renounced to flow-through share investors with respect to 15 specified minerals. The minerals in this group including lithium and copper play key roles in the production and processing of advanced materials, semiconductors and clean technology, including batteries and permanent magnets used in zero-emission vehicles.
We are already seeing positive impact. Since April PearTree as just one market participant has already closed over $40M in flow-through offerings in which the CMETC will be claimed. As with the introduction of any new tax legislation the Canada Revenue Agency (“CRA”) will be vigilant in monitoring compliance. We see one landmine issue easily mitigated. The legislation requires that in order for exploration expenses to be eligible for the CMETC a “qualified engineer or geoscientist” (“QP”) certifies on or before the financing that the expenditures that will be renounced will be incurred as part of an exploration project that targets the specified minerals. If the QP cannot demonstrate that there is a reasonable expectation that the minerals targeted by the exploration are primarily specified minerals, then the related exploration expenditures would not be eligible for the CMETC.
Many of the critical minerals in respect of which exploration expenditures would qualify for the CMETC commonly occur in association with minerals not on the Critical Minerals list. This is especially so for copper and gold. Under the current Draft Legislation, the QP must certify that the primary target of the exploration is critical minerals. Our understanding is that “primary” in this context means more than 50 percent.
Over the past 15 years PearTree has sponsored well over 400 financings in which tax shelter reporting is required. We obtained all the federal and Quebec advance income tax rulings and Technical Interpretations upon which all flow-through donation financings are based. We actively consult with government and understand better than anyone the need for tax compliance and the ability to directly and convincingly respond to the CRA audit questions. The draft legislation does not require an independent QP.
Whenever there is a conflict or perception of conflict the CRA audit concerns increase. And while the in-house QP who might also be the CEO or VP Exploration has an exemplary lifetime career of undisputed integrity, a cynical tax auditor with the benefit of hindsight in which for example, the drill results support more gold than copper, may very well challenge the conclusions in the QP Certificate. If so, the auditor will disallow the tax credit claimed by the flow-through share subscriber who, in turn makes a claim against the issuer under the issuer tax indemnity contained in every subscription agreement.
Our recommendation is a second opinion even if the QP is independent. It isn’t required but think of it as disability insurance. If you can afford it, you buy it and hope that you never make a claim. Same here. The process is simple, the QP Certificate including the data upon which the certificate is based is provided for review and confirmation to any one of a number of professional firms providing these reports. The cost is modest, under $5,000, and goes a long way in satisfying the CRA if the question is raised. For those interested in a broader appreciation of this issue please visit The PearTree Perspective. On request we will be pleased to provide copies of our Department of Finance submissions. Please contact Alanna Clark, VP Government Relations at [email protected]
