Canada's Positive Investment Climate for Mineral Capital

Information Bulletin, November 2014

(published in January 2015)

Mineral Potential

Canada is geographically the second largest country in the world. Its diversified geological terranes provide a rich variety of mineral resources. Canada currently produces some 60 minerals and metals. It is the world’s leader in the production of potash, and is a major producer of primary aluminum, cobalt, diamonds, molybdenum, nickel, platinum group metals, salt, titanium concentrate, tungsten, uranium, and zinc. In addition, mineral exploration has diversified in recent years, leading to increased interest in commodities such as rare earth elements, graphite, chromite, coal, and potash, and adding to Canada’s already considerable list of promising prospective targets.

The provision of geoscience data has long been an important role of the governments of Canada through the Geological Survey of Canada and the provincial geological surveys. Data produced by the geological surveys are available to Canadian and foreign individuals and corporations in digital, cartographic, and report format.

Regulatory Environment for Mineral Development

Fundamental to Canada’s attractiveness as a destination for mineral investment capital is its stable federal-provincial/territorial political system with clear roles and responsibilities at each level. The provinces have responsibility for the ownership and management of natural resources, exploration and mineral permitting, and land access and security of tenure. The federal government has authority with respect to such areas as fisheries, international and interprovincial trade and commerce, banking, the environment (shared with the provinces), nuclear issues (including uranium mining), and taxation.

Mineral rights are owned by the provincial governments, and the territorial government in the case of Yukon and the Northwest Territories. For Nunavut and the offshore, the federal government holds the mineral rights. Mineral rights can be leased by individuals or companies, and these leases are fully transferable without government intervention or review. A basic principle of the Canadian system is “use it or lose it.” To keep a claim in good standing, a company must undertake a minimum level of work each year. This ensures that companies do not hold large blocks of land indefinitely. Within the Canadian system, there is a clear and defined process by which a proponent moves a project from discovery to production.

Both the federal and provincial/territorial governments are responsible for the environmental assessment of mining projects. The purpose of these assessments is to determine whether significant adverse environmental impacts may result from a project’s development and, if there are impacts, to ensure they will be mitigated. The federal government established the Major Projects Management Office and the Northern Project Management Office to ensure the coordination of federal environment-related activities.

Companies operating in Canada recognize the importance of dealing directly with Aboriginal peoples, and consult with these communities on their exploration and development plans. To ensure that the company and Aboriginal communities understand their respective roles and obligations with respect to mineral development, formal instruments (e.g., Impact and Benefits Agreements) may be negotiated. These contractual agreements help ensure long-term harmonious relations between mining companies and nearby communities.

The Fraser Institute, in its 2013 Survey of Mining Companies, ranked 119 mining jurisdictions based on the opinions of mining executives representing 690 mineral exploration and development companies. Nine of the top thirty jurisdictions identified were located in Canada (Alberta, New Brunswick, Newfoundland and Labrador, Saskatchewan, Yukon, Quebec, Ontario, Manitoba, and Nova Scotia), indicating that Canada has a very favourable regulatory environment for mineral development. This belief is further reinforced by the fact that Canada, according to the SNL-Metals Economics Group, has been the most preferred global target for mineral exploration over the past decade.

Foreign Investment Regulations

Rules and regulations are known and are applied in a non-discriminatory fashion to both domestic and foreign companies alike. Foreign investors wishing to establish a new enterprise are generally free to do so; there are no restrictions on foreign exchange or on the repatriation of capital or profits, withholding tax rates are low, and equity capital can be repatriated tax free.

Canada is open to foreign investment and does not restrict foreign involvement in the development of its mineral resources based on deposit size, minimum government equity participation, or commodity (except for uranium). Under the 1987 Non-Resident Ownership Policy, foreign companies are free to explore for uranium but, once a property starts to produce uranium, it must be 51% Canadian-owned. This majority requirement may be waived by the federal government if no Canadian investor can be found.

The Investment Canada Act reviews foreign investment above an announced asset threshold to determine if it will be of net benefit to Canada. The threshold for a transaction for investors from World Trade Organization (WTO) member countries is $354 million for 2014 (the figure is adjusted annually). For investors from non-WTO member countries, the review threshold is $5 million for direct investments. Indirect acquisitions by WTO member investors are not renewable, but are nonetheless subject to notification (there are special rules for cultural businesses).

Supportive Mining-Related Cluster

Canada has a well-developed mining industry around which a cluster of mining-related equipment and service providers has developed.

This cluster of over 3,000 companies supports Canadian-based companies in over 100 countries around the world. Areas of expertise include: exploration, exploration financing, investment analysis, due diligence, legal services, geophysics, geology, geochemistry, remote sensing, drilling, analytical laboratories, engineering services, logistical support, and environmental management, to name just a few.

Companies listed on Canadian stock exchanges (e.g., TSX and TSX-V) are responsible for between one third and one half of all global equity raised for mineral development. In fact, over 55% of the world’s publicly listed mining companies list in Canada. Canada’s standing as a world source of equity financing for mineral capital is supported by the governments of Canada through security regulators that impose disclosure standards on firms to provide timely and accurate reporting to investors, helping to ensure fair and efficient capital markets.

This ability to raise equity, along with a strong mining tradition supported by government regulations, has led to the development of a two-tier industry consisting of junior exploration companies (companies with no revenue from an operating mine) and senior companies (corporations with producing mines). Usually, junior exploration companies undertake mineral exploration to discover and define projects in order to sell them to a senior company. While some juniors may decide to develop a project on their own or with a partner, senior companies are most likely to bring a mine into production.. Junior exploration companies account for around 40% of all exploration undertaken in Canada, and specialize in high-risk grassroots exploration. Notable successes related to junior exploration companies include the discoveries of the Ekati diamond mine in the Northwest Territories, the Voisey’s Bay nickel-copper mine in Labrador, and the Ring of Fire (chromite-nickel-platinum group metals) exploration camp in northern Ontario.

The existence of this active junior sector enables senior companies to focus their exploration activities around their existing operations while out-sourcing, through a variety of financial arrangements, high-risk exploration across Canada. At any one time, Canadian junior companies are evaluating some 3,000 properties across Canada at every stage of development. These properties are potentially available for purchase by both domestic and foreign investors.

Competitive Fiscal Regimes

Canada’s tax regimes for mining are amongst the most competitive in the world and reflect the realities of provincial ownership and royalties, high risk, and capital intensity, as well as a conscious decision by government to encourage this industrial activity. In Canada, companies are subjected to taxes at three levels: federal, provincial or territorial, and municipal. This ensures that all levels of government benefit when a mine enters production.

Since 2003, Canada’s federal corporate income tax rate has dropped from 29.12% (includes the 1.12% corporate surtax eliminated on January 1, 2008) to 15% in 2012.

Canada’s internationally competitive tax regime features incentives such as the Canadian Exploration Expense (100% deduction), Canadian Development Expense (30% deduction), and a 3-year loss carry-back and 20-year loss carry-forward provision. In addition to the existence of a number of provincial/territorial tax and non-tax incentives for mineral exploration, royalties or mining taxes, for the most part, are profit-based rather than based on tonnage or revenue.

A unique feature of Canada’s tax regimes is flow-through shares (FTS). Flow-through shares enable a company to transfer eligible exploration and development expenses to investors. These expenses or deductions can be used by investors to reduce their taxable income from Canadian sources. Because the shares carry a tax deduction, they are sold at a premium compared to regular shares, enabling a junior company to raise relatively more funds to continue its exploration activities.

In 2000, the federal government introduced the Mineral Exploration Tax Credit (METC), a 15% income tax credit related to surface or above-surface exploration. The METC works in conjunction with Canada’s FTS mechanism and offers investors a 15% tax credit (reduction of taxes payable) in addition to a 100% write-off of exploration expenses.

Canada has excellent mineral potential, a stable and favourable investment climate for mineral capital, and is open for business.

© Her Majesty the Queen in Right of Canada, as represented by the Minister of Natural Resources, 2014