Making the case for an increased Mineral Exploration Tax Credit (METC)
Mineral exploration is a high-risk endeavor, and as such, attracting investment for early-stage, non-revenue generating exploration companies is extremely difficult.
To address this challenge, the ‘made-in-Canada’ flow-through share (FTS) financing mechanism plays a critical role in encouraging domestic exploration. This mechanism enables companies to issue a type of security that provides investors with certain tax deductions that reduce the net costs of this investment. Over the last decade, flow-through financing accounted for more than two-thirds of all the funds raised on Canadian exchanges for exploration in Canada, with increased importance during periods when other sources of capital are sparse.
The Mineral Exploration Tax Credit (METC) is another key incentive, providing investors with an additional 15% tax credit for funds directed towards early-stage exploration activities. These incentives are highly cost effective as for every $1 of implied government spending (via reduction in tax revenue), approximately $5 of flow-through funding is raised and government evaluation indicates that each FTS dollar spent leads to an additional $3 in exploration spending (Finance Canada, October 1994).
As Figure 1 outlines, the annual METC cost to the Government has ranged between $25M and $70M over the last five years while helping to generate roughly $8 billion in domestic exploration activity.
Increasing the METC rate from 15% to 30% will decrease FTS investor net costs and raise the attractiveness of this financing vehicle. This will help spur exploration activity across Canada, support a recovery of the mineral sector from the impacts of COVID-19 and expedite the search for critical metals.
Further increasing the METC rate to 40% when funds are invested in Canada’s Territories will help to level the playing field by making investment in these regions even more attractive and support the important goal of northern economic development.
Figure 2 compares net costs of a $1000 FTS investments for an Ontario resident as well as for the average Canadian investor, under different METC scenarios.
Current situation:
- Scenario 1: investing in projects located in regions where the investor is taxed
- Scenario 2: investing in projects in other regions
Implementing PDAC recommendation:
- Scenario 3: investing in projects located in regions where the investor is taxed with METC at 30% in provinces and 40% in the territories.
- Scenario 4: investing in a project in another province with METC at 30%
- Scenario 5: investing in a project in a territory with METC at 40%.
Figure 2: Impact of METC on Investors’ Net Costs
Two conclusions are evident in the figure above. Firstly, a nationwide increase in the federal METC rate (from 15% to 30%) will reduce investors’ net costs by ~20%. Secondly, increasing the METC rate to 40% for investments in the territories will further encourage activity in Canada’s north and help to offset the significantly higher costs of operating in northern regions.
Adjusting an already-existing tax incentive is a simple yet impactful way to help the mineral exploration sector recover from COVID-19 pandemic, increase potential for discovery of minerals critical to Canada’s economy and help affect our transition to a low-carbon future.