Mineral Exploration Tax Credit (METC)

Reports Containing an Evaluation of the METC

Purpose and Scope

In the Economic Statement and Budget Update of October 18, 2000, the federal government announced a temporary 15% tax credit for investors in flow-through shares of mineral exploration companies. The METC is a measure designed to assist junior mining companies in raising new equity through flow-through shares. This additional financing should help exploration companies maintain or increase the amount of exploration activity in Canada.

The METC originally applied to eligible exploration expenses incurred after October 17, 2000, and before January 1, 2004. The credit has since been extended several times. Budget 2013 extended the expiry date to March 31, 2014. (see Federal Budget 2013).

The METC applies only to preliminary mineral exploration activities conducted at or above ground level. It does not apply to expenses related to oil and gas, coal, bituminous sands or oil shale, underground exploration, or bringing a mine into production.

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.

Benefits

The 15% on eligible expenses can be applied against a taxpayer's federal income tax otherwise payable for the taxation year during which the investment was 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 may also claim the 100% Canadian Exploration Expenses (CEE) deduction which applies for both federal and provincial/territorial income tax purposes. Taxpayers residing in provinces/territories that provide additional exploration incentives may claim them in combination with the METC, but using any tax credit offered by the provinces/territories reduces the amount of expenses eligible for the METC and the amount of deductible CEE. Using the METC also reduces the balance of taxpayers’ Cumulative Canadian Exploration account.

Eligible Taxpayers

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 (PBC), are eligible for the METC. PBCs, for these purposes, are corporations whose principal business is exploration, mining, or mineral processing.

Eligible Exploration Expenses

Expenses eligible for the METC are specifically defined as flow-through mining expenditures (FTME). Technically, FTME are restricted to the type of Canadian exploration expenses that are described in paragraph (f) of subsection 66.1(6) of the federal Income Tax Act (ITA) and that meet the 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:

  1. 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;
  2. after March 2013, and before January 1, 2016, pursuant to a flow-through share agreement entered into before April 1, 2014;
  3. 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, which includes the collection 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.

Renouncing CEE to Flow-Through Share Investors

The rules related to eligible exploration expenses for flow-through shares have not changed. All CEE, including underground and pre-production development expenses, described in paragraphs (f) and (g) of subsection 66.1(6) of the ITA, can still be renounced to flow-through share investors. However, only the expenses that meet the FTME requirements are 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.

Responsibility of Corporations

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 CEE 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 which expenses are eligible to be renounced and which expenses qualify for the METC.

Benefits of Investing in Flow-Through Shares Eligible for the METC

Because the federal investment incentive is delivered in the form of a tax credit, it is the same for all individual investors regardless 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, 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 with 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.

METC benefits are contingent on the particular conditions of the flow-through share agreement. Due to the complex nature of the income tax rules that apply to flow-through shares, professional advice should be sought when structuring such agreements.

 

After-Tax Cost of a $1,000 FTS Investment

After-Tax Cost of a $1,000 Investment in Flow-Through Shares
Top Marginal Tax Rates (as of December 2013)

After-Tax Cost of a $1000 Investment in Flow-Through Shares Top Marginal Tax Rates (as of December 2013)
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Text version

After-Tax Cost of a $1,000 Investment in Flow-Through Shares Top Marginal Tax Rates (as of December 2013)

The chart is a stacked bar chart that highlights the after-tax cost of a $1,000 investment in flow-through shares for the province or territory where the taxpayer resides, taking into account the top marginal tax rate of the taxpayer as of December 2013. The taxpayer reduces the cost of his or her investment according to the amount of abatements or tax credits available under the tax acts in force in each jurisdiction. The investment cost data by jurisdiction are shown in ascending order. A taxpayer in Quebec has the lowest after-tax cost at $258. This is followed by Manitoba at $319, British Columbia at $383, Ontario at $408, Nova Scotia at $425, Saskatchewan at $428, Prince Edward Island at $447, New Brunswick at $467, the Northwest Territories at $484, the Yukon at $490, Newfoundland and Labrador at $490, Nunavut at $506, and lastly, Alberta at $519. The variation in the after-tax cost among the various jurisdictions is due mainly to the different tax rates in force and the availability of tax credits and allowances over and above the Canadian Exploration Expense deduction.

 

For further information:

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

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.

Related Links

You can access all forms prescribed by the Canada Revenue Agency here.

The Prospectors and Developers Association of Canada site contains relevant information: