It is in the budget: new measures for mining companies and a new super flow-through financing tax credit for investors

On April 7, 2022, the federal government of Canada delivered Budget 2022 (federal budget). As part of the government’s push for economic growth in areas like clean technology, health care, aerospace, and computing, industries in which critical minerals play an essential role, the federal budget proposes to provide up to $3.8 billion in support over eight years to implement Canada’s first critical minerals strategy, and introduces a new “super flow-through” 30% critical mineral exploration tax credit (CMETC) aimed at increasing investment for certain mining companies exploring for specified critical minerals.

On Aug. 9, 2022, the department of finance released draft legislation to implement the CMETC, and on Nov. 3, 2022, in its fall economic statement, the federal government reiterated
its commitment regarding the critical minerals’ strategy and CMETC.

The CMETC is a new 30% tax credit for specified mineral exploration expenses incurred in Canada and renounced to investors in flow-through shares (FTS) as part of FTS agreements entered after April 7, 2022, and on or before March 31, 2027. It applies to certain exploration expenditures targeted at nickel, lithium, cobalt, graphite, copper, rare earth elements, vanadium, tellurium, gallium, scandium, titanium, magnesium, zinc, platinum group metals, or uranium, which tend to be used in solar panels, batteries, permanent magnets and other electric vehicle components (i.e., critical minerals).

This CMETC is a new tax incentive to be added to the existing federal FTS regime under the Income Tax Act (Canada), which already allows certain investors to benefit from (i) a deduction of 100% of the qualifying resource exploration expenditures renounced by an eligible corporation in its favour; and (ii) in certain cases, an additional 15% tax credit (15% federal tax credit) for individuals on certain grassroots qualifying resource exploration expenditures.

The new 30% CMETC follows the current rules for the 15% federal tax credit but applies only to projects targeting critical minerals. Taxpayers cannot claim both the 15% federal tax credit and the 30% CMETC with respect to the same qualifying resource expenditure, and the 15% federal tax credit cannot be used as a “fallback” option.

To qualify for the 30% CMETC, a “qualified engineer or geoscientist” must certify that the expenditures will be incurred pursuant to an exploration plan that primarily targets critical minerals (i.e., targets deposits containing more than 50% critical minerals). The CMETC certification must be made in a prescribed form up to 12 months before the time the FTS agreement is entered into.

The Canada Revenue Agency (CRA) has not yet released the CMETC certification prescribed form, even though eligible issuers have been able to enter FTS agreements targeting critical minerals since April 7, 2022. In the meantime, with respect to CMETC certifications made in advance of the prescribed form being released, the CRA will accept a letter signed by the “qualified engineer or geoscientist” that includes certain information, such as why it is expected that the mineral deposit(s) being explored will primarily contain critical minerals.

According to CRA guidance, issuers should keep in their records (in case requested by CRA) documents that support the certification, such as claim outline(s) and number(s), descriptions of geological features of the property(ies), and proposed exploration activity(ies) and how they relate to the targeted critical minerals, as well as copies of exploration plan(s).

The introduction of the critical minerals’ strategy and the CMETC are anticipated to be a welcome relief for many mineral exploration companies in Canada, and an exciting opportunity for other market participants. Specifically, we expect that some of the benefits will include the following:

> Increasing interest in the Canadian critical minerals space. A recent World Bank Group report finds that the production of critical minerals could increase by 500% by 2050 to meet the surging demand for clean energy. We think that Canada, being recognized as a leading mining nation with enormous potential for discovery of mineral resources, is well-positioned to benefit from a rise in global demand for critical minerals, and that the introduction of the CMETC will enable it to become a more attractive destination for critical minerals investment.

> Assisting companies advance exploration projects. The government’s financial commitment to the critical minerals’ strategy and introduction of the CMETC should assist exploration companies in securing funding for critical minerals projects, and thereby reduce part of the risk profile associated with such early-stage projects. We think that these new measures may also prompt certain mining companies to reconsider their current focus and evaluate making changes, where possible, towards qualified resources with potential for critical minerals. In a working paper published in October 2021, the International Monetary Fund noted that it expects global demand for copper, nickel, cobalt, and lithium to increase over the next 20 years, with significant increases expected in both prices and demand in the event we transition to net-zero CO₂ emissions in 2050, another trend we expect will assist in the advancement of projects with potential for critical minerals.

> Encouraging capital-raising activities. We expect to see a renewed interest and increase in FTS financings by Canadian issuers exploring for critical minerals. With the new CMETC doubling the tax credit rate of the existing credit, the break-even point for investors is reduced significantly. The timing of the CMETC also coincides with recent new prospectus exemptions, aimed at providing a more efficient method for issuers listed on a Canadian stock exchange to raise capital from a broader base of eligible investors, which could be a way for a broader group of investors to participate directly in these tax-efficient investments which have traditionally been available only to certain eligible investors (typically “accredited investors”).

> Stimulating alternative investment vehicles. Flow-through funds play a significant role in the junior mining industry, raising significant amounts of capital for deployment to exploration companies and providing investors with income tax savings via a deduction of 100% of the amount invested in the fund, as well as indirect exposure to a diversified portfolio of FTS acquired by the fund over time. Given the increased interest in critical minerals exploration, the improved income tax incentives, and the anticipated uptick in flow-through financings by critical minerals mining companies, we also expect to see an uptick in the aggregate amount of capital raised by flow-through funds, that will be deployed to critical minerals mining companies, while the CMETC is available.

For further information and insight on the topics discussed in this article, please refer to the Dentons Insight published by the authors and available at https://www.dentonsmininglaw.com

MICHAEL SABUSCO is a partner at Dentons Canada and practices in the corporate, securities, and M&A groups. He is also the Ontario lead for the firm’s national mining committee.

EMMANUEL SALA is a partner at Dentons Canada and practices in the corporate and tax groups. He is also the Québec lead for the firm’s national mining committee.

MATTHEW IMRIE is a senior associate in Dentons Canada’s corporate group.