On March 28, 2023, the Government of Canada issued the 2023 Canadian federal Budget[1], proposing amendments to the Income Tax Act[2](Tax Act), which include lithium from brines as a “mineral resource” pursuant to the Tax Act. This proposal was the subject of a recent insight published by the Dentons Mining Law Canada Blog.
As a reminder, without amending the definitions of “mineral resource” or “Canadian exploration expense” under the Tax Act, the 30% Critical Mineral Exploration Tax Credit can only be claimed with regards to certain critical minerals if the Minister of Natural Resources issues a certification. Moreover, this certification cannot be obtained with regards to certain critical minerals (i.e., if the targeted critical mineral is not an industrial mineral contained in non-bedded deposit)[3].
On August 4, 2023, the Department of Finance released draft income tax legislation[4] (Draft Legislation) to implement amendments proposed in the 2023 Canadian federal budget. The Draft Legislation amends the definition of “mineral resource” in subsection 248(1) of the Tax Act for it to mean, amongst other things, a mineral deposit in respect of which the principal mineral extracted is lithium.
This proposed amendment seems to indicate that the Canadian legislator wanted to extend the definition of “mineral resource” to all types of lithium deposits rather than only lithium from brines. If the proposed amendment is sanctioned, any mineral deposit in respect of which the principal mineral extracted is lithium should qualify as a “mineral resource” pursuant to subsection 248(1) of the Tax Act. As a result, taxpayers should not be required to request the certification from the Minister of Natural Resources which we have discussed in one of our latest Dentons insights.
The Draft Legislation is retroactive to March 28, 2023, and applies to expenses incurred after that time.
On another note, paragraph (f) of the definition of “Canadian Exploration Expense” under subsection 66.1(6) of the Tax Act does not include certain expenses. The limitations for an expense to qualify as a “Canadian Exploration Expense” involve the concept of a “mine.” The Draft Legislation provides, in our view, clarity as to what constitutes a “mine” with regards to a lithium deposit to avoid a loophole situation.
For further information on the Draft Legislation, the qualification of a critical mineral as a “mineral resource” or any of the other tax‑related topics, please contact authors Emmanuel Sala, Shereen Cook or Victor Qian.
[1] Budget 2023 – A Made‑‑in‑‑Canada Plan : Strong Middle Class, Affordable Economy, Healthy Future (Federal Budget), released by the Department of Finance of Canada on March 28, 2023.
[2] An Act Respecting Income Taxes, Revised Statutes of Canada 1985, c. 1 (5th Supplement), as amended.
[3] An example would be lithium from brines: in a technical interpretation, Canada Revenue Agency took the position that lithium from brines does not meet the particular requirements to be considered an industrial mineral contained in a non-bedded deposit, as brines are typically found in bedded, sedimentary deposits. Canada Revenue Agency, Income Tax Severed Letter External T.I. 2020-0858761E5, “Lithium Production Project” (15 December 2020)
[4] Department of Finance of Canada, Legislative Proposals Relating to the Income Tax Act and the Income Tax Regulations (Budget 2023 and other proposals), August 4, 2023.
