On April 7, 2022, the Government of Canada delivered Budget 2022 – A Plan to Grow Our Economy and Make Life More Affordable (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 CA$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. In the same vein, the Federal Budget proposes accelerating the prior timeline to eliminate the “flow-through shares” (FTSs) regime for oil, gas, and coal activities from 2025 to 2023.
On August 9, 2022, the Department of Finance released draft income tax legislation to implement the CMETC. On November 3, 2022, in its Fall Economic Statement, the federal government reiterated its commitment to the Critical Minerals Strategy, including the 30% CMETC. In addition, the Fall Economic Statement includes a proposal for new refundable investment tax credits of up to 30% for investments in clean technologies and at least 40% for investments in clean hydrogen production. These new investment tax credits will be made available for eligible investments made as of the day of next year’s federal budget, which is expected to be delivered in the spring of 2023.
New measures for mining companies
In the Federal Budget, the Canadian federal government outlined additional measures to increase investments in agriculture, critical minerals, and semiconductors in an effort to help make Canada a leader in clean and digital technologies. With respect to mining, specifically, the Federal Budget outlines significant investments that would focus on priority critical mineral deposits to contribute to the development of a domestic zero-emission vehicle value chain, including batteries, permanent magnets, and other electric vehicle components. The Federal Budget proposes to provide up to CA$3.8 billion in support over eight years to implement Canada’s first Critical Minerals Strategy, which includes: (i) spending (up to CA$1.5 billion over seven years, starting in 2023-24) related to infrastructure investments that would support the development of critical minerals supply chains, with a focus on priority deposits; (ii) spending (approx. CA$79 million over five years, starting in 2022-23) related to providing public access to integrated data sets to inform critical mineral exploration and development; and (iii) the introduction of the 30% CMETC.
In addition to contributing to the development of a domestic zero-emission vehicle value chain, the Critical Mineral Strategy intends to create thousands of jobs for Canadians, make critical mineral mining projects a less risky undertaking for companies, and facilitate financing.
New 30% Critical Mineral Exploration Tax Credit (CMETC)
The CMETC is a new 30 percent tax credit for specified mineral exploration expenses incurred in Canada and renounced to FTSs investors as part of FTSs agreements entered into after April 7, 2022, and on or before March 31, 2027. It applies to certain exploration expenditures in Canada 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 (Critical Minerals).
This CMETC is a new tax incentive to be added to the existing federal FTSs regime provided for in the Income Tax Act (Canada), which allows certain corporations, generally junior mining companies, to finance their exploration activities more easily. The federal FTSs regime already provides generous income tax incentives to any investor who subscribes for basic “plain vanilla” common shares as long as these are issued by eligible corporations pursuant to an FTSs agreement according to which the issuer corporation undertakes to transfer qualifying resource exploration expenditures to the investor. The transfer of qualifying resource exploration expenditures to an investor entitles it to the following Canadian federal income tax benefits: (i) a deduction of 100% of the qualifying resource exploration expenditures renounced by an eligible issuer corporation in its favour (General Tax Deduction); and (ii) in certain cases an additional 15% mineral exploration income tax credit (15% Federal Tax Credit) for individuals (excluding trusts) on certain grassroots qualifying resource exploration expenditures. The federal FTSs regime is particularly interesting for junior mining companies, for which income tax deductions have little or no value during the exploration phase of the mining cycle. It allows them to monetize the income tax deductions they would otherwise not be able to immediately take advantage of.
The new CMETC entitles the investor to a 30% mineral exploration income tax credit in addition to the General Tax Deduction and is available to individuals in respect of qualifying resource exploration expenditures incurred by an eligible issuer corporation after April 7, 2022, and renounced in favour of its investors under FTSs agreements entered into after April 7, 2022, and on or before March 31, 2027. An FTS investor can claim the 30% CMETC in the taxation year in which the eligible issuer corporation renounced (or is deemed to have renounced under the very popular look-back rule regime) qualifying resource exploration expenditures in its favour. Resource exploration expenditures qualifying for the 30% CMETC and the 15% Federal Tax Credit regime are substantially the same, namely certain grassroots qualifying resource exploration expenditures incurred for determining the existence, location, extent or quality of a mineral resource in Canada.
The new 30% CMETC generally follows the current rules in place for the 15% Federal Tax Credit but applies only to projects targeting Critical Minerals. In addition, it should be noted that taxpayers cannot claim both the 15% Federal Tax Credit and the 30% CMETC with respect to the same qualifying resource exploration expenditure. Furthermore, the 15% Federal Tax Credit cannot be used as a “fallback” option. In other words, if an investor claims the 30% CMETC and the claim is subsequently denied by the Canada Revenue Agency, the investor cannot then claim the 15% Federal Tax Credit. In that case, the investor would only be entitled to the General Tax Deduction.
To qualify for the 30% CMETC, a “qualified engineer or geoscientist” must certify that the qualifying resource exploration expenditures will be incurred pursuant to an exploration plan that primarily targets Critical Minerals, which means that the exploration activities must target mineral deposits containing primarily (more than 50%) Critical Minerals. The CMETC certification must be made in a prescribed manner and form up to 12 months before the time the FTSs agreement is entered into. The qualified engineer or geoscientist must also act reasonably, in their professional capacity, in completing the CMETC certification. Being a “qualified engineer or geoscientist” does not require the professional to be an independent party from the eligible issuer corporation that enters into the FTSs agreement. Consequently, a “qualified engineer or geoscientist” may be an employee of the eligible issuer corporation.
The Canada Revenue Agency has not yet released the prescribed form to be followed by the “qualified engineer or geoscientist” to issue the CMETC certification, despite the fact that eligible issuer corporations have been able to enter into FTSs agreements targeting Critical Minerals since April 7, 2022, and complete these types of super flow-through financings.However, in response to a recent query, the Canada Revenue Agency issued guidance on October 5, 2022, indicating that the prescribed form is expected to be released to the public in the coming weeks and it would likely be required to be filed as an attachment to one of the existing forms that are already required to be filed in connection with an FTSs financing, such as the T100A, Flow-Through Share Information – Application for a Selling Instrument T100, Identification Number (SITIN). As of November 8, 2022, the prescribed form has yet to be made available to the public, but we expect it to be released in the near future.
In the meantime, with respect to CMETC certifications made in advance of the prescribed form being released, the Canada Revenue Agency will accept a letter signed by the “qualified engineer or geoscientist” that includes the following information:
- The name, address, and business number of the eligible issuer corporation offering the FTSs;
- The targeted Critical Mineral(s);
- A brief explanation of why it is expected that the mineral deposit(s) being explored will primarily contain (i.e., more than 50%) Critical Minerals;
- The name, occupation, and business address of the qualified engineer or geoscientist; and
- The name of the professional association to which the qualified engineer or geoscientist belongs and their membership identification number.
According to the guidance, issuers seeking the CMETC certification should keep in their records and make available to the Canada Revenue Agency, upon request, the following documents::
- Map of the project area, including claim outline(s) and claim number(s);
- Description of the geological features of the property(ies);
- Description of proposed exploration activity(ies) and how they relate to the targeted Critical Mineral(s);
- Copies of exploration plan(s) submitted for approval to the board of directors of the eligible issuer corporation; and
- Copies of exploration plan(s) submitted for approval to regulating authorities.
Dentons’ insight
The introduction of the Critical Minerals Strategy (including the new 30% CMETC) is 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:
- Increasing interest in the Canadian Critical Minerals space. The impact of the new 30% CMETC should be significant. A recent World Bank Group report finds that the production of Critical Minerals could increase by nearly 500% by 2050 to meet the surging demand for clean energy. With recent grant programs, such as the federal Critical Minerals Research, Development and Demonstration Program, the Ontario Junior Exploration Program, and the Québec Mining Research and Innovation Support Program, and provincial roadmaps such as Ontario’s Critical Minerals Strategy and Québec’s Plan for the Development of Critical and Strategic Minerals, the country and its provinces are aligned on improving their competitiveness within the global mining industry. In addition, new measures geared towards Canada’s push for clean energy that were proposed in its Fall Economic Statement 2022 may also indirectly benefit the Canadian Critical Minerals space. For instance, one of the categories of equipment eligible for the new refundable investment tax credit in clean technologies is zero-emission non-road vehicles and related equipment used for mining. With Critical Minerals being a keystone part of the transition towards clean energy, any incentive related to this effort may positively impact the Canadian Critical Minerals space. For more information regarding the Fall Economic Statement 2022, please refer to a related insight. We think that Canada, being recognized as a leading mining nation with enormous potential for the discovery of mineral resources, is well positioned to benefit from a rise in global demand for Critical Minerals and that the introduction of the new CMETC and the other incentives geared towards clean energy will enable it to become a more attractive destination for Critical Minerals investment.
- Assisting companies advance exploration projects. The government’s commitment to providing significant financial support over eight years to implement Canada’s first Critical Minerals Strategy and the introduction of this new super flow-through credit should assist exploration companies in securing funding for their cost of exploring for Critical Minerals and thereby reduce part of the risk profile associated with such early-stage projects. We think that these new government measures and improved tax incentives may also prompt certain mining companies to reconsider their current focus with respect to their principal minerals and projects (particularly where a deposit shows potential for Critical Minerals), and evaluate making changes where possible, to their project plans and work programs towards qualified resources with potential for Critical Minerals. In a working paper on Energy Transition Metals 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 twenty years, with significant increases expected in both prices and demand in the event of a net-zero emission scenario (a scenario that assumes 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 a general increase in FTSs financings by Canadian issuers exploring for Critical Minerals. With the new CMETC doubling the tax credit rate of the existing 15% Federal Tax Credit, the break-even point for investors is reduced significantly. The timing of the 30% CMETC also coincides with recent announcements by the Canadian Securities Administrators of new prospectus exemptions, including an exemption (the Listed Issuer Financing Exemption) announced on September 8, 2022, 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 than would be permitted under pre-existing exemptions. The new Listed Issuer Financing Exemption could be a way for a broader group of investors to participate directly in these tax-efficient investments in early-stage companies, which have traditionally been available by private placements only to certain eligible investors (typically “accredited investors”). For more information regarding the Listed Issuer Financing Exemption, please refer to a related insight. In addition, on October 25, 2022, the Ontario Securities Commission announced an 18-month pilot program that provides Ontario investors with qualifying education or work experience access to increased investment opportunities under the self-certified investor prospectus exemption (the Ontario Self-Certified Investor Exemption), discussed in a recent insight. The Ontario Self-Certified Investor Exemption follows a recent trend of similar self-certified investor prospectus exemptions that were initially announced by Securities Administrators in Alberta and Saskatchewan on March 31, 2021, and expanded on July 28, 2022 (discussed in a previous insight) in response to feedback and to spur investment and provide enhanced flexibility for investors and businesses in Alberta and Saskatchewan.
- Stimulating alternative investment vehicles. Given the expected increased interest in FTSs financings by many mineral exploration companies, we also expect to see an increase in the amount of capital raised by flow-through funds (typically in the form of limited partnerships) while the 30% CMETC is available. These flow-through funds generally use the proceeds raised from their investors to fund a portfolio of junior mining companies seeking financing by issuing FTSs. Flow-through funds play an important role in the junior mining industry, raising significant amounts of capital for deployment to junior mining companies with mineral exploration and development projects in Canada 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 FTSs acquired by the fund over time. The qualifying resource exploration expenditures renounced by the eligible issuer corporations in favour of the fund are ultimately flowed-through to the investors in the fund (expenditures on which any additional credits, such as the 15% Federal Tax Credit or the new 30% CMETC, if applicable, can be claimed by the investors in the fund). This type of investment vehicle also allows a broad group of investors, including retail investors, to participate in these tax-efficient investments since they are typically offered and sold by public offering pursuant to a prospectus. 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 ultimately be deployed to Critical Minerals mining companies, while the 30% CMETC is available.
In light of the above, we encourage management of mining companies engaged in exploration that primarily targets Critical Minerals to take action now to ensure that the CMETC certification takes place during the exploration phase and well in advance of undertaking its next FTSs financing and entering into any FTSs agreements.
For further information on the Federal Budget, the new 30% CMETC or any of the other topics discussed in this Insight, please contact authors Michael Sabusco, Emmanuel Sala, Matthew Imrie, and Victor Qian.
