Finance & Taxation

A stormy landscape: A helping hand

An inside look at how explorers and developers are navigating the capital crisis with federal and provincial assistance.

When prospector Shawn Ryan was tinkering with an exploration model that would lead to the White Gold discovery in Yukon’s Tintina gold belt during the early 2000s, he and his family lived off the roughly $10,000 a year that he received from the Yukon Mining Incentive Program.

Six years after Ryan’s discovery, the White Gold deposit boasts resources of more than 800,000 oz. gold, according to Kinross Gold Corporation, which bought the property in 2010 for $139 million. And the incentive program that kept Ryan afloat, and that contributed to a new wave of gold exploration in the Yukon, has expanded to $1.4 million in 2014, including up to $15,000 for prospectors and up to $50,000 for companies at the target evaluation stage.

“We’ve sought these increases when risk capital has been difficult to raise because wewant to sustain a minimum level of exploration activity,” says Carolyn Relf, Director of the Yukon Geological Survey, who notes that the program’s name was recently changed to the Yukon Mineral Exploration Program (YMEP) to better reflect the type of work it seeks to encourage. Over the past decade funds have been as high as $1.8 million (during the global economic downturn in 2008-2009) and as low as $570,000.

When capital markets for mineral exploration are strong there is less need for publically-funded programs such as YMEP. But the market is cyclical, and for the past couple of years junior mining has been mired in a bear phase that has made raising equity for exploration and development projects difficult—if not impossible.

Grassroots exploration is being hit particularly hard, with expenditures dropping from $2.9 billion in 2011 to $1.2 billion in 2013, according to Natural Resources Canada. As expenditures on grassroots exploration drop, so too does the probability that new deposits will be discovered. As existing mines close and new mines fail to replace them, governments and communities across Canada lose economic benefits, particularly employment in rural and remote areas, and taxes and royalties ($9 billion paid in 2011 alone).

Several Canadian jurisdictions have devised creative ways to soften the blow during market downturns and prevent the knock-on effect on local businesses and employment, as well as the “pipeline” of potential mineral projects. In step with the Yukon, both Quebec and Manitoba have responded to the capital crisis by increasing fiscal supports for the mineral industry.

Quebec, a long-time supporter of its exploration industry, is unique in providing venture capital funding through organizations such as the Caisse de Dépôt et Placement du Québec (Sodemex Exploration) and SIDEX. In 2013 when financing for mining juniors listed on the TSX-V fell to just over $1 billion—an 80% decline from 2011 levels—the Caisse responded by launching a new $250-million fund that will invest $5 to 20 million in Quebec companies in the natural resources sector with projects that have reached the development stage. The new funding will allow more companies to advance their properties from exploration to development. In addition, the Quebec government finances mineral exploration indirectly through SOQUEM, a $100M venture-capital fund managed by Ressources Québec through Investissement Québec.

In Manitoba, a direct appeal from the exploration community to Mineral Resources Minister Dave Chomiak (particularly from Stephen Masson, a PDAC Director and former President of the Manitoba and Saskatchewan Prospectors and Developers Association, as well as Ed Huebert, Executive Vice-President of the Manitoba Mining Association) was the spark that convinced the provincial government to double its incentive program, MEAP, to $3 million for 2014. Manitoba is also doubling work assessment credits for exploration conducted in 2014 and 2015, a move that will allow companies to hold onto their properties until market conditions improve.

“It became apparent that the juniors were really struggling and we had the ability to put a package of incentives together,” says Chris Beaumont-Smith, Manager of Minerals Policy & Business Development for the Manitoba Geological Survey. “The prospecting and mining associations wanted us to raise the profile of our programs in hopes that it would assist them in financing their projects.”

To further understand some of the various initiatives taking place across Canada that are supporting exploration and the development of new mines, the PDAC approached every jurisdiction in Canada to compile the following list of incentives available for exploration, including federal and provincial tax breaks, grants, prospecting funds and other mechanisms.

Federal Incentives
The primary fiscal support provided by the federal government is the Super Flow-Through system that allows companies to deduct 100% of their Canadian eligible exploration expenses (CEE), then “flow-through” those expenses to investors who can claim them against personal income. Companies are eligible for an added 15% credit, called the Mineral Exploration Tax Credit (METC), for exploration completed from or above surface (as opposed to underground exploration).

Under current legislation, the METC will terminate for new investment on March 31, 2015. PDAC has long called for the METC to be renewed on a three-year basis, instead of annually, to provide certainty to both companies and investors and give companies more flexibility to conduct community consultations and manage any regulatory delays.

Another federal incentive is the Prospector’s and Grubstaker’s Shares Deduction, a tax provision that allows prospectors to deduct 50% of the value of shares received, sold and included as income from their total taxable income.

Manitoba Initiatives
When an appeal came in from the exploration community last November, Manitoba moved quickly to double its incentives program to $3 million. Here’s what’s on offer for explorers in 2014:

The $3 million Mineral Exploration Assistance Program provides funds of up to 40% of eligible expenditures (50% for projects in remote parts of Manitoba) to a maximum of $200,000 per recipient per year.
The $125,000 Manitoba Prospectors Assistance Program provides grants of 50% of eligible costs to a maximum of $7,500 per year. Applicants working in remote areas can also receive 80% of approved charter air transportation.
The Manitoba Mineral Exploration Tax Credit is a 30% non-refundable personal income tax credit for Manitoba residents who invest in eligible flow-through shares of qualifying mineral exploration companies.
Off-site Exploration Allowance 
Companies that increase their exploration activities in search of new mines in Manitoba are entitled to a tax deduction equal to 150% of exploration expenditures.

Work Assessment Credits
Assessment credits will be doubled for eligible exploration expenses for the calendar years 2014 and 2015.

Provincial Incentives
Tax credits & rebates 
Jurisdictions: BC, MB, NB, NU, ON, QC
Above and beyond the tax incentives offered by the federal government, some jurisdictions offer their own tax breaks for exploration. They range from income tax deductions for companies and/or their investors to rebates for fuel taxes paid while using vehicles for exploration.

Quebec has the most generous tax support. Mineral producers can deduct 125% of exploration expenses, while investors can claim as much as 150% of the cost of flow-through shares on their personal income taxes.

British Columbia, Manitoba, Ontario and Saskatchewan also complement the federal flow-through share program by providing additional deductions to resident investors ranging from a refundable tax credit of 5% in Ontario to a 30% non-refundable credit in Manitoba.

More targeted incentives include a fuel tax rebate for vehicles used for exploration in Nunavut and a 150% income tax deduction for producers in New Brunswick.

Jurisdictions: MB, NB, NL, NS, YK
More than half of Canada’s provinces and territories offer grants to defray the cost of exploration. These non-repayable grants reimburse a certain percentage of the cost (e.g. 50%) up to a maximum amount (e.g. $100,000).

Some of these grants include incentives to encourage certain kinds of exploration. Newfoundland and Labrador, for instance, offers larger amounts for greenfields or remote exploration. In the Yukon, both companies and individuals can apply for up to $50,000 for projects moving into the advanced stage, provided they match the funding.

As one of the most generous, Manitoba’s Mineral Exploration Assistance Program (MEAP) provides up to 40% of approved eligible expenditures for exploration in the province and up to 50% for projects conducted in the Lynn Lake/Leaf Rapids and other northern and remote areas of Manitoba. A maximum of $200,000 per recipient per fiscal year is available.

Programs for Prospectors
Jurisdictions: MB, NB, NL, NS, NU, NT, ON, YK
Individual prospectors can benefit from a myriad of assistance programs, including grants which are most commonly up to $15,000 per year. In Manitoba, as well as Newfoundland and Labrador, additional funding is available for air transport to remote regions.

In some provinces, help with marketing and education is available. Nova Scotia and New Brunswick support prospectors who want to attend trade shows such as the PDAC Convention. Newfoundland and Labrador provides professional instruction and other resources for a two-week course in basic prospecting skills, while resident geologists offer introductory prospecting courses in every community in Nunavut. In addition, Nova Scotia offers an on-line course for prospectors.

Ontario is unique in requesting a net smelter royalty (NSR) on future production in exchange for grants of up to $85,000 to its prospectors. The program currently has $1.5 million in the treasury and several applications, but no NSRs are paying out to date.

Venture Capital
Jurisdiction: QC
Quebec stands out for being the only province to provide venture capital for exploration and development through organizations such as the Caisse de Dépôt et Placement du Québec and SIDEX. The Caisse’s Sodémex Exploration fund has invested about $50 million in junior companies since 1996, while SIDEX was created in 2001 by the Quebec government and Fonds de solidarité FTQ (the largest development capital network in Quebec) with a $50 million budget over five years. SIDEX’s mandate is to diversify Quebec’s mineral base and open new areas for exploration.

In 2013 the Caisse announced the creation of Sodémex Development, a $250-million fund that will make investments of $5 to 20 million in Quebec companies in the natural resources sector that have reached the development stage.

Contribution Agreements for Infrastructure
Jurisdiction: NU
In Nunavut, the government will contribute funds for mutually-beneficial infrastructure development (e.g. a road built to an advanced exploration or mining project).

Going Forward
Manitoba, Quebec and the Yukon, recognizing the value of maintaining exploration spending not just for the promise of new deposits but for the knock on effect on local economies, have responded to the current capital crisis by increasing or maintaining funding for their incentive programs. Other jurisdictions may want to follow their example to maintain their mineral exploration ecosystem and sustain grassroots exploration, particularly in remote and rural parts of the country.

“Governments can do a number of things to make Canada an attractive place to explore, including investments in pre-competitive geoscience and in infrastructure to reduce the costs of exploration and mining in remote parts of Canada,” says Ross Gallinger, Executive Director of the PDAC. “We applaud those jurisdictions that are enhancing the fiscal incentives available to support grassroots exploration to ensure that we continue to discover the mines of the future.”

Fiscal incentives can play an important part in sustaining different elements of Canada’s unique mineral exploration ecosystem, from the grassroots prospector to companies conducting advanced exploration using flow-through funding. While they are not a silver bullet, they can certainly constitute a silver lining in what is currently a sky full of dark clouds.

 By Virginia Heffernan