Mineral Exploration Tax Credit

2010 Budget Extends the Mineral Exploration Tax Credit until March 31, 2011

History of the Tax Credit Since 2000

Reports Containing an Evaluation of the Tax Credit

Taxation Issues for the Mining Industry:
2010 Update (HTML) (PDF, 220 kb)
Taxation Issues for the Mining Industry:
2009 Update (HTML) (PDF, 664 kb)
Taxation Issues for the Mining Industry:
2007 Update (HTML) (PDF, 243 kb)
Taxation Issues for the Mining Industry:
2006 Update (HTML) (PDF, 327 kb)
Taxation Issues for the Mining Industry:
2005 Update (HTML) (PDF, 3.8 mb)
Taxation Issues for the Mining Industry:
2004 Update (HTML) (PDF, 423 kb)
2003 Evaluation Report: Taxation Issues Relating to Exploration and to the Restructuring of Resource Taxation (HTML) (PDF, 430 kb)
2002 preliminary Evaluation Report
(HTML) (PDF, 1.15 mb)

Program Description

Program's Purpose and Scope

In the Economic Statement and Budget Update of October 18, 2000, the federal government announced a temporary, 15% investment tax credit for investors in flow-through shares of mineral exploration companies.

This Mineral Exploration Tax Credit (METC) is a measure designed to assist junior mining companies in raising new equity through the issuance of flow-through shares. This additional financing should help exploration companies to maintain, or increase, their level of exploration activities in Canada. The METC applies to eligible exploration expenses incurred after October 17, 2000, and before January 1, 2004. The program has since been extended several times. Budget 2010 extended the expiry date to March 31, 2011.

The program applies only to preliminary mineral exploration activities conducted from or above ground. It does not apply to oil and gas, coal, bituminous sands or oil shale; expenses incurred to explore underground, or for the purpose of bringing a mine into production, are also excluded.

The information included below is based on Finance Canada publications, and is intended as a general guide only. In cases of doubt the wording of the Finance Canada publications takes precedence.

Program Benefits

A tax credit of 15% of eligible expenses can be applied against a taxpayer's federal income tax otherwise payable for the taxation year during which the investment is made. The METC is a non-refundable tax credit that can be carried back three years and carried forward twenty years. A taxpayer claiming the METC will also be allowed to claim the normal 100% Canadian Exploration Expense (CEE) deduction, which applies for both federal and provincial/territorial income tax purposes. Use of the METC will reduce the taxpayer's Cumulative Canadian Exploration Expense account. Taxpayers residing in provinces/territories that provide additional exploration incentives are allowed to claim them in combination with the METC, but the use of any tax credit offered by provinces/territories will reduce the amount of expenses eligible for the METC and the amount of deductible CEE.

Persons qualifying for the tax credit

Individuals (other than a trust) who are deemed to incur eligible exploration expenses, either individually or through a partnership, pursuant to a flow-through share agreement with a "principal-business corporation," are eligible for the credit. Principal-business corporations, for these purposes, are corporations whose principal business is exploration, mining and mineral processing.

Eligible exploration expenses

Eligible expenses for the purposes of the METC are specifically defined as "flow-through mining expenditures" (FTME). Technically, FTME are restricted to the portion of a Canadian Exploration Expense that is described in paragraph (f) of its definition, in subsection 66.1(6) of the federal Income Tax Act (ITA), and that meet additional criteria referred to in subparagraph 16(d) of the Notice of Ways and Means Motion in the October 2000 Economic Statement and Budget Update, and in the December 21, 2000, Finance Canada news release.

In general terms, FTME must be incurred:

for the purpose of determining the existence, location, extent and quality of a "mineral resource," which, for METC purposes,
- is a deposit of base or precious metals, diamonds, ammonite gemstones, halite, sylvite, calcium chloride, gypsum, kaolin, or other industrial minerals subject to certification by the Minister of Natural Resources Canada (as described in Section 248 (1) of the ITA),
- but excludes a deposit of coal, bituminous sands or oil shale;
after October 17, 2000, and before January 1, 2012, pursuant to a flow-through share agreement entered into before March 31, 2011;
in respect of a mining exploration activity that is conducted from or above the surface of the earth, and that includes prospecting, geological, geophysical and geochemical surveys, drilling (rotary, diamond, percussion or other methods), and "specified sampling" that includes the collecting and testing of samples in respect of a mineral resource to the extent that:
- the weight of each sample collected does not exceed 15 tonnes;
- and the total weight of all samples (other than samples that are less than one tonne in weight) collected in respect of any one mineral resource in a calendar year by any person or partnership or any combination of persons and partnerships does not exceed 1000 tonnes.

Canadian Exploration Expenses that do not qualify as FTME can still be renounced to flow-through share investors

The rules related to eligible exploration expenses for flow-through shares have not been changed. All Canadian Exploration Expenses (CEE) that are described in paragraphs (f) and (g) of subsection 66.1(6) of the ITA, which include underground and "pre-production development expenses," can still be renounced to flow-through share investors. However, only the portion of the expenses that meets the requirements of the FTME is eligible for the METC.

The rules that specify the time periods during which CEE related to flow-through shares must be incurred apply to the METC.

Corporations carrying out exploration will have to keep track of the different types of exploration and of where they conduct exploration work

The METC is only available for expenses related to exploration carried out from or above the surface of the earth. However, a corporation, in the course of its exploration program, may also incur expenses that qualify only for the Canadian Exploration Expense deduction. Therefore, the onus will be on the corporation to correctly identify and renounce the different categories of exploration expenses for federal income tax purposes. The corporation should keep proper records documenting the expenses that are eligible to be renounced and that qualify for the METC.

Advantages for the individual taxpayer of investing in flow-through shares that involve expenses eligible for the METC

Because the federal investment incentive is delivered in the form of a tax credit, its value is the same for all individual investors, irrespective of their marginal federal income tax rates. However, a large portion of federal flow-through share incentives is still delivered in the form of an income tax deduction (as a Canadian Exploration Expense), the value of which varies with a taxpayer's marginal tax rate. Due to the variability of provincial/territorial incentives for flow-through shares, the after-tax situation of a taxpayer will also depend on his/her province or territory of residence.

The figure below illustrates the average after-tax cost of a flow-through share investment for individual taxpayers facing the average top marginal tax rate under specific assumptions. The underlying calculations are for illustrative purposes only and may not reflect the particular circumstances of any specific taxpayer.

The METC program benefits are contingent on the particular conditions of the flow-through share agreement. Due to the complex nature of the income tax rules applying to flow-through shares, qualified professional advice should be sought to help structure such agreements.

Further information is available from:

Natural Resources Canada
Minerals and Metals Sector
580 Booth Street, Ottawa, ON K1A 0E4
E-mail: credit@nrcan.gc.ca

Frequently Asked Questions on the METC Program (FAQ)

Excerpt from Finance Canada Backgrounder to News Release 00-101 December 21, 2000, clarifying the Definition of Eligible Expenses

Flow-Through Share Investment Tax Credit

The Department of Finance has received submissions from the public relating to the category of expenses eligible for the 15 percent flow-through share investment tax credit announced in the October 2000 Economic Statement and Budget Update.

In response to submissions received, the Government intends to broaden the category of expenses falling within the definition of "flow-through mining expenditure" in the following two ways:

allow, in addition to expenses incurred in determining the "existence" or "location" of a mineral resource, expenses incurred in determining the "extent" or "quality" of the mineral resource; and
include, in addition to expenses that are described in subparagraph 16(d) of the Notice of Ways and Means Motion in the October Economic Statement and Budget Update, expenses that are described in paragraph (f) of the definition "Canadian exploration expense" in subsection 66.1(6) of the Income Tax Act and that are in respect of specified sampling (or in respect of digging test pits for the purpose of carrying out specified sampling).

For this purpose, it is proposed that "specified sampling" be the collecting and testing of samples in respect of a mineral resource to the extent that

the weight of each sample collected does not exceed 15 tonnes; and
the total weight of all samples (other than samples that are less than one tonne in weight) collected in respect of any one mineral resource in a calendar year by any person or partnership or any combination of persons and partnerships does not exceed 1000 tonnes.

The Government intends to include these changes in the Bill that is to be introduced in the House of Commons in early 2001.