Last week’s
federal budget
contained some changes to the flow-through share regime: some positive, and some negative. Before reviewing the changes, here’s a primer on how flow-through shares work.
Flow-through shares allow corporations to renounce, or essentially “flow through,” Canadian exploration expenses (CEE), including Canadian renewable and conservation expenses (CRCE), and Canadian development expenses (CDE) to investors. Investors can then deduct these expenses in
calculating their own taxable income
(at a 100 per cent rate for CEE, including CRCE, and at a 30 per cent rate for CDE).
The
Critical Mineral Exploration Tax Credit
(CMETC) provides an additional income tax benefit for individuals who invest in eligible flow-through shares, and is equal to 30 per cent of specified mineral exploration expenses incurred in Canada, which are then renounced to flow-through share investors. Currently, the following critical minerals are eligible for the CMETC: nickel, cobalt, graphite, copper, rare earth elements, vanadium, tellurium, gallium, scandium, titanium, magnesium, zinc, platinum group metals, uranium and lithium.
The federal budget proposed to expand the list of critical minerals to also include: bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin and tungsten. These new rules would apply to expenses renounced under eligible flow-through share agreements entered into after the budget day, until March 31, 2027.
But, it’s not all good news for flow-through share investors. The government is also changing the definition of CEE, which typically includes expenses incurred by a taxpayer for the purpose of determining the existence, location, extent, or “quality” of a mineral resource in Canada. The determination of a mineral resource’s “quality” for CEE purposes has historically been interpreted by the Canada Revenue Agency (CRA) as referring primarily to the resource’s underlying physical characteristics. Expenses for technical studies (which are typically undertaken to assess a mineral resource’s engineering feasibility and economic viability as a mining project, rather than its underlying physical characteristics) have traditionally been viewed by the CRA as being excluded from CEE.
A recent decision of the Supreme Court of British Columbia, however, held that the reference to “quality” under the provincial equivalent of the federal CEE definition could be interpreted to include the economic viability, and not just the physical characteristics, of a mineral resource.
The federal government, possibly because of this decision, is changing the law. In the budget, the government proposed to amend the Income Tax Act to clarify that expenses incurred for the purpose of determining the quality of a mineral resource in Canada do not include expenses related to determining the economic viability or engineering feasibility of the mineral resource. This change, if ultimately passed, would apply as of budget day.
Finally, and perhaps most significantly for retail investors who purchase flow-through shares either for investment or for charitable giving, the budget noted that the government would be cancelling its August 2024 draft legislative proposal that would have allowed resource expense deductions to be 100 per cent deductible under the
Alternative Minimum Tax
(AMT) regime.
As a reminder, the AMT system imposes a
minimum level of tax on taxpayers
who claim certain tax deductions,
exemptions or credits
to reduce the tax that they owe to very low levels. Under the AMT system, there is a parallel tax calculation that allows fewer deductions, exemptions and credits than under the regular income tax calculation. If the amount of tax calculated under the AMT system is more than the amount of tax owing under the regular tax system, the difference owing is payable as AMT for the year. Changes to the AMT came into effect in 2024 and include raising the AMT rate, increasing the AMT exemption and broadening the AMT base by limiting certain amounts that reduce taxes (such as exemptions, deductions and credits).
In August 2024, draft legislation proposed a 100 per cent deduction for resource expenses, as well as interest on borrowed funds related to these investments, for AMT purposes. This was a welcome proposal for flow-through share investors, as these expenses were previously added back in full for AMT purposes.
But the August 2024 legislation was never passed into law and died on the order paper when the government was prorogued. It was expected to be reintroduced in the new session, but instead, the government has backtracked, and announced that it would not be proceeding with this change.
This news, however, was buried deep in the footnotes to Table A1.18 (which runs ten pages) of the federal budget document, on page 277. The footnote refers to a line item that shows the cost of cancelling the proposed capital gains tax increase and related measures. The footnote simply reads: “The estimates for cancelling the proposed capital gains tax increase also include the cancellation … of the proposal to fully allow resource expense deductions under the (AMT).”
I reached out to other tax professionals to find out what they thought. Burying this material tax policy change in the footnote did not sit well with some of them.
“The reversal of tax policies is as significant as implementing new tax policies and should receive appropriate consideration in the budget document,” said John Oakey, vice-president taxation, with the Chartered Professional Accountants of Canada, in an e-mail to me. “Announcing tax policy changes in budget footnotes is not an appropriate way to inform taxpayers or their advisor,” he said.
Henry Korenblum, vice-president, sales and tax planning with Oberon Capital Corp., which facilitates tax-effective charitable giving using flow-through shares, said in an e-mail: “It is disappointing that the government has decided to abandon these proposals which would have provided support to the natural resource and mining sector and which would have increased an investor’s or donor’s flow-through capacity (to invest or donate).”
And Ron Bernbaum, the founder and chief executive officer of PearTree Financial Services Ltd., another facilitator of flow-through share financing and charitable giving, was equally disappointed in his e-mail response to me. PearTree had provided extensive analysis to the Department of Finance in early 2024 demonstrating that eliminating the CEE addback to AMT would add at least $350 million annually in exploration financing with immediate impact and job creation. That data likely informed the government’s August 2024 proposal, which subsequently died.
“We expected to see it back in the budget. It wasn’t,” said Bernbaum.
Jamie Golombek,
FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.
Jamie.Golombek@cibc.com
.
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