JV Article: Tax tsunami may destroy Canadian resource exploration financing, PearTree warns

Investments of more than $300 million in mineral exploration will be lost in 2024 and in all future years if Ottawa goes through with its new alternative minimum tax (AMT) rules in Budget 2024, says PearTree Canada Founder and CEO Ron Bernbaum. That means exploration finance will decline by at least a third from about $1 billion to around $700 million if these new rules are enacted.  

AMT’S effect on mineral exploration 

The Critical Mineral Exploration Tax Credit (CMETC) is one of the best examples of how well tax incentives work. In the CMETC’s first year, more than $350 million in accretive investment was raised for 38 critical mineral projects. According to Bernbaum, PearTree clients purchased $225 million of that total. If the new AMT rules had been in effect in 2022/23, PearTree Clients would have purchased just $150 million, a loss to the Canadian economy of $75 million in exploration activity. Assuming that most investors in flow-through share financings have a similar profile to the PearTree client, then by extension, the $350 million invested would have amounted to $225 million. That translates to job loss associated with direct northern investment of $125 million and less likelihood of finding viable critical mineral deposits. 

The Canadian government has ambitious goals related to climate change and electrification, all requiring precious and critical minerals, and yet it is implementing new AMT rules that will cut investment in mineral exploration by one-third. 

Fewer than 14,500 high income Canadian taxpayers fund almost 90% of all FTS investment, about $1 billion annually, according to data published by the Canada Revenue Agency. PearTree funds almost half of all FTS financings in Canada. 

“The new AMT rules are said to target fewer than 25,000 high-net worth Canadians,” Bernbaum notes. “Unfortunately, it's the same group of taxpayers all subject to AMT who fund most Canadian exploration. FTS tax incentives drive high-risk investment in mineral exploration, reducing issuer dilution due to premiums to market paid by investors for the tax benefits when subscribing for the shares. If the tax incentives are not accessible or severely limited, no one is going to pay a premium or even choose to make an investment.”   

Flow-through shares are uniquely Canadian and relied upon by the sector. They are vital to attracting investors who are concerned by the wide divergence between high commodity prices and low company valuations. 

Under the prior AMT rules, the average PearTree FTS subscriber purchased $239,000 in FTS. To access all the tax incentives, the subscribing taxpayer required $800,000 in T4 income. Under the new AMT rules, the average investor will need 150% more taxable T4 income ($1.2 million) to make the same investment in 2024. If the new AMT rules had been in effect in 2022, the same investor would have only been able to invest $159,333 before reaching their AMT limit. 

While AMT was proposed in Budget 2023 and was supposed to take effect in January, there’s been no legislation thus far to enact the changes. However, flow-through share (FTS) financings that support mineral exploration are already down over 60% this year compared to the same period in 2023, PearTree says. 

Kendra Johnston, Managing Director at PearTree, underscores the heightened AMT funding risk in Quebec and British Columbia, where a small number of high-income taxpayers contribute to the majority of FTS financings. In Quebec, approximately 90% of FTS financings are funded by 3,230 taxpayers, and in B.C., 90% is funded by just 2,340 taxpayers all subject to AMT. 

When Osisko Mining (TSX: OSK) was exploring one of Canada’s largest proposed gold developments, the Windfall project in Quebec, it worked with PearTree Canada to fund more than $400 million in FTS financings.  

Osisko has exclusively used flow-through financing over the past eight years to raise non-dilutive capital for drilling and other exploration work on Windfall’s discovery and delineation, CEO John Burzynski says. The more than 300 jobs created so far is slated to double. “We have had to deal with very mixed markets for financing during that time and the steady availability of flow-through was critical to us,” Burzynski said. “The job creation and tax contributions which will flow from this project over its mine life make Windfall an example of the true benefits of flow-through.” 

Windfall, now being developed under a joint venture with Gold Fields (NYSE: GFI; JSE: GFI), is projected to produce 306,000 oz. of gold annually over an initial 10-year mine life, according to a 2022 feasibility study. One of Quebec’s largest ever high-grade underground deposits, Windfall is expected to be a top-tier producer for decades.  

Flow-through and charitable giving 

PearTree pioneered the combination of two established tax incentives, FTS and charitable donations. In the structure, generous Canadians subscribe for FTS accessing the FTS tax incentive followed by the immediate donation and sale of the shares by the charities to global investors at a discount to market once stripped of tax value. It's common to see an FTS issued at a 35% premium to market then donated and sold at a 15% discount to market. Issuers and their investors suffer less dilution and charity buyers enjoy a discount to market. This approach, known as ‘charity flow-through,' accounts for more than 80% of all FTS capital raised. 

The new AMT rules target both FTS and charitable giving. In the case of donations, whether by shares or cash, the new AMT rules limit the charity tax credit to 50% of the gift amount. The combination of the AMT limitations in both sectors results in the tsunami negative impact on the resource sector.  

PearTree clients participate in charitable flow-through by purchasing FTS for the purpose of donating those shares to charity. “A higher AMT means that an individual can purchase less FTS. Individuals purchase up to their AMT levels; we know this because our team does hundreds of AMT calculations for clients every year,” Bernbaum said. For subscriptions in FTS funding critical minerals, the negative tax consequences are worse since the critical mineral tax credit is 30% in comparison to 15% available for non-critical minerals. 

“The proposed changes will take the wind out of the CMETC’s sails,” Bernbaum says.  

The federal Finance Department told The Northern Miner by email it held public consultations on these reforms this summer and is currently reviewing feedback from Canadians and stakeholders. 
 
“Canadians expect the government to make sure that the wealthiest among us pay their fair share of tax,” a department official said. “That is why last year’s budget proposed to modernize and strengthen the AMT, which has not been substantially updated since it was first introduced over thirty years ago.” The proposed changes would not affect the treatment of the mineral exploration tax credit and the CMETC, the official said. Since the April 2023 budget, PearTree has provided lengthy written verifiable submissions to the contrary, offering to provide even more detailed disclosure. To date no government official has responded to the submissions.  

AMT’s effect on charities 

In the same way that an increased AMT will reduce the ability of donors and investors to purchase FTS, it will reduce the ability of donors to donate. The proposed AMT rules will disallow donors using the full value of their tax credits when calculating their tax liability.  

Charitable FTS financing is a commonly used strategy for donating major gifts. It is widely known in the charitable community that 90% of money donated comes from 10% of donors. 

The largest transformational gifts are made when there is a major one-time economic event such as the sale of a business, a property or a C-suite retirement; AMT is an additional tax that simply will cut the amount of donations, PearTree says. In these circumstances, AMT is not a timing issue, as the federal government has promoted, rather it is an absolute additional tax which invariably will result in a material reduction in donations to public charities, the largest segment being health care.   

“As philanthropy allows for the distribution of wealth within society, it is the charities and those served by charities that will suffer most,” Bernbaum says. “When charities, such as hospitals, lose out on major gifts because of AMT, will government be there to close the gap? Or will vulnerable Canadians be left without?” 

PearTree’s recommendations 

Through numerous public consultations and independent advocacy, PearTree has recommended tax credits on donations be removed from the AMT calculation, that the 0% inclusion rate for capital gains on donations of publicly listed securities be retained, and that the capital gains calculation under AMT be based on the subscription price rather than nil as it is under the regular tax calculation. 

With the budget slated to be released on Mar. 19, the industry anxiously awaits certainty. Ottawa needs to re-think its approach to AMT if it wants to honour its commitments and meet its ambitious climate goals, PearTree says.   

The preceding Joint Venture Article is PROMOTED CONTENT sponsored by PearTree and produced in co-operation with The Northern Miner. Visit: www.peartreecanada.com for more information.