Mining-Specific Tax Provisions

Page Index

Introduction

This text summarizes the federal corporate income tax provisions that apply specifically to the mining and the oil and gas industries, but with a special emphasis on mining. Although provincial/territorial corporate income tax regimes generally parallel federal income tax rules, provinces and territories also have special tax provisions for mining, both at the corporate income tax level and at the mining tax/royalty level.

The Tax Administration page offers practical guidelines to help understand how the tax provisions can be applied in the specific circumstances where certain determinations are required.

For taxation purposes, mining activities are divided into two distinct stages: extraction and processing, and semi-fabrication and fabrication. The extraction and processing stages, which include concentrating, smelting and refining, are given special treatment under the corporate income tax regimes of both the federal government and the provinces/territories.

At the federal level, this special treatment includes the following tax provisions:

  • Deduction of provincial/territorial mining taxes and royalties;
  • Canadian Exploration Expenses (CEE);
  • Investment Tax Credit for Pre-Production Expenditures;
  • Flow-Through Shares (FTS) and the Mineral Exploration Tax Credit (METC);
  • Foreign Resource Expenses (FRE) and Foreign Exploration and Development Expenses (FEDE);
  • Canadian Development Expenses (CDE) and Canadian Oil and Gas Property Expenses (COGPE);
  • Special class of Capital Cost Allowance (CCA);
  • Accelerated Capital Cost Allowance (ACCA);
  • Investment Tax Credit for qualified property acquired for use in the Atlantic provinces and the Gaspé peninsula;
  • Treatment of foreign ores; and
  • Deduction for mine reclamation trust fund contributions.

Although not currently applicable, the following provisions are relevant to earlier taxation years, or to expenses incurred in earlier taxation years:

  • Resource Allowance; and
  • Depletion Allowance.

The semi-fabrication and fabrication of metal products are considered to be manufacturing activities. As such, they are accorded the same general treatment as other manufacturing activities in the economy.

Important Definitions

  • “Principal-business corporation” means a corporation, the principal business of which is any of, or a combination of:
    1. Exploring or drilling for petroleum or natural gas, or the production, refining or marketing of petroleum, petroleum products or natural gas, or the operation of a pipeline for the transmission of oil or gas;
    2. Mining or exploring for minerals;
    3. The fabrication of metals;
    4. The production, processing or marketing of calcium chloride, gypsum, kaolin, sodium chloride, or potash;
    5. The generation of electrical energy or the development of electrical energy projects.
  • “Mineral resource” means:
    1. A base- or precious-metal deposit;
    2. A coal deposit;
    3. A mineral deposit from which the principal extracted substance is diamond or ammonite gemstone, potash, sodium chloride, gypsum, or silica (if extracted from sandstone or quartzite);
    4. A certified non-bedded deposit from which an industrial mineral is the principal mineral extracted;
    5. A bituminous sands or oil shale deposit.

Deduction of Provincial/Territorial Mining Taxes and Royalties

Since January 1, 2007, mining taxes and royalties paid to a province or a territory with respect to income from a mineral resource are fully deductible in computing income for federal income tax purposes. In earlier taxation years, taxpayers were allowed to deduct a resource allowance to compensate for the non-deductibility of crown royalties and mining taxes.

Capital Cost Allowances (CCA)

The depreciation of tangible assets is allowed under the system of capital cost allowances (CCA). The capital cost of each particular depreciable asset used for the purpose of gaining or producing resource income is allocated to the appropriate class of assets for which a maximum annual depreciation rate is prescribed. Government assistance such as grants and investment tax credits, plus proceeds of disposition of assets (not exceeding the acquisition cost), are deducted from the class.

Most capital assets acquired by mining and oil and gas companies are included in Class 41, which qualifies for a depreciation rate of 25% on a declining balance basis. Class 41 includes:

  • All buildings, structures, machinery and equipment used in the extraction and processing (concentrating, smelting and refining) of a mineral resource that is not beyond the prime metal stage or its equivalent;
  • Motive equipment and railway facilities (excluding rolling stock) used to produce income from a mine;
  • Loading and unloading assets used at the mine or at the mineral processing facilities;
  • Electrical generating and distributing equipment used for mining;
  • Assets that provide services to the mine or to the community where a substantial portion of the persons employed at the mine reside (hospital, school, airport, fire hall, etc.).

Equipment used in a manufacturing and processing operation (Class 43) beyond the prime metal stage qualifies for a deduction of 30% (declining balance).

The deduction for CCA may be reduced or delayed by the half-year rule or the available-for-use rule. The former rule restricts the claim in the year of acquisition to half of the maximum whereas the latter rule requires an asset to be available for use before any CCA can be deducted.

Accelerated Capital Cost Allowance (ACCA)

In addition to the normal 25% rate of depreciation accorded to Class 41 assets, the ACCA can provide for an additional depreciation allowance of up to 100% of the asset cost. To be eligible for that accelerated depreciation, however, assets must have been acquired before the beginning of commercial production, or for major expansions, or (since 1996) for the portion of investment expenditures in excess of 5% of the gross income from the mine.

Budget 2007 proposed to phase out the accelerated Capital Cost Allowance (ACCA) for oil sands projects—both mining and in-situ operations. The regular 25% CCA rate will remain in place.

Transition Schedule of ACCA for Oil Sands
Year 2007-2010 2011 2012 2013 2014 After 2014
Percentage 100% 90% 80% 60% 30% 0%

Budget 2013 further proposed to phase out the additional accelerated Capital Cost Allowance (ACCA) available for mining over the 2017-2020 period and treat these assets as regular CCA at 25%.

Transition Schedule of ACCA for Mining
Year 2013-2016 2017 2018 2019 2020 After 2020
Percentage 100% 90% 80% 60% 30% 0%

The amount of ACCA that can be claimed in a year is equal to the balance of unclaimed capital cost in the class, but it cannot exceed the income of the mine. The amount claimed is optional in that any amount can be claimed up to the allowed maximum rate. In the calculation of taxable income, the ACCA deduction is taken after the normal CCA, but before the resource allowance, CEE, and CDE.

Essentially, the ACCA acts to provide the full write-off of capital costs before a mine starts to pay income tax. As such, this tax provision protects the early income of a mine so that this income can be applied to reduce debt and minimize the financial vulnerability of the mine during cyclical downturns.

The 1996 budget announced two changes to the CCA rules that benefit the resource industry. The first proposal provided for the same ACCA for oil sands "in situ" projects as are currently provided to oil sands mines. The second proposal provided a new form of ACCA for all mines, including all oil sands projects, that allows taxpayers to fully deduct (subject to the half-year rule) the cost of depreciable assets incurred in a year on a mine, in excess of 5% of the gross revenue from the mine for the year, to the extent of the taxpayer's income from the mine.

Investment Tax Credit for Qualified Property Acquired for Use in the Atlantic Provinces and the Gaspé Peninsula (AITC)

A 10% investment tax credit applies to qualified property acquired for use in the Atlantic provinces and the Gaspé peninsula. Qualified property includes depreciable assets acquired and used for the purpose of exploring for and developing a mineral resource, extracting minerals from a mineral resource and processing a mineral resource, up to the prime metal stage or its equivalent.

Budget 2012 proposes to phase out the Atlantic Investment Tax Credit (AITC) for investments in the oil and gas and mining sectors over a four-year period. It will apply at a rate of 10% for assets acquired before 2014 for use in any of the activities listed above, and at a rate of 5% for such assets acquired in 2014 and 2015. The AITC will not be available for such assets acquired after 2015. However, projects already under way will continue to benefit from the tax credit until 2017.

Transition Schedule of AITC
Year 2012 2013 2014 2015 After 2015
Percentage 10% 10% 5% 5% 0%

Canadian Exploration Expenses (CEE)

CEE are expenses incurred by the taxpayer for the purpose of determining the existence, location, extent, or quality of a mineral resource, or petroleum or natural gas, in Canada, including expenses involved with:

  • Prospecting;
  • Geological, geophysical, or geochemical surveys,
  • Drilling (rotary, diamond, percussion, or other methods), and/or
  • Trenching, digging test pits, and preliminary sampling.

CEE also include expenses incurred for the purpose of bringing a new mine into production, including clearing, removing overburden and stripping, and sinking a mine shaft. These expenses can be described as pre-production development costs.

Budget 2011 proposed that development expenses incurred for the purpose of bringing a new oil sands mine into production in reasonable commercial quantities be treated as Canadian Development Expenses (CDE) rather than CEE as in the past.

Transition Schedule for Oil Sands Pre-production Development Expenses
Year 2011 2012 2013 2014 2015 After 2015
CEE proportion 100% 100% 80% 60% 30% 0%
CDE proportion 0% 0% 20% 40% 70% 100%

Budget 2013 further proposes that pre-production mine development expenses be treated as Canadian Development Expenses (CDE) which are deductible on a 30% declining-balance basis. The transition schedule is as follows. For example, before 2015, all pre-production mine development expenses would be treated as CEE and are 100% deductible; in 2015, only 80% of such expenses are treated as CEE with the remaining being treated as CDE (30%).

Transition Schedule for Mining Pre-production Development Expenses
Year 2013 2014 2015 2016 2017 After 2017
CEE proportion 100% 100% 80% 60% 30% 0%
CDE proportion 0% 0% 20% 40% 70% 100%

An exploration expense does not include any expense related to a mine that has come into production in reasonable commercial quantities. It also does not generally include any expense incurred in drilling or completing an oil and gas well, or preparing a site for a well, when that well is brought into production within a specified period of time after incurring the expense, or when the total expense incurred to bring that well into production is less than $5 million.

There is a 100% deduction available in respect of CEE in the year that the expenditure is incurred. The deduction is optional and, in the case of a principal business corporation, cannot be used to create a non-capital loss. Any unused balance of CEE in a particular year can be carried forward indefinitely and claimed in a later year at the election of the taxpayer.

Investment Tax Credit (ITC) for Pre-Production Mining Expenditures

The ITC for Pre-Production Mining Expenditures is a 10% non-refundable credit available to a Canadian corporation that incurs mineral exploration and mine development expenses in respect of a new mine or a major mine expansion where the final products are base or precious metals, or diamonds. The credit applies only to qualified expenditures that are not renounced under the terms of a flow-through share agreement.

Investment tax credits are described in section 127 of the Income Tax Act. Budget 2012 proposed to phase out the ITC for Pre-Production Mining Expenditures.

Transition Schedule of ITC for Pre-production Mining Expenditures
Year 2012 2013 2014 2015 After 2015
Exploration 10% 5% 0% 0% 0%
Development 10% 10% 7% 4% 0%

See details in Corporate Income Tax Rules of General Application or the Federal Budget 2012 (page 451) directly.

Foreign Resource Expense (FRE) and Foreign Exploration and Development Expense (FEDE)

The FRE and the FEDE claims are available to corporations resident in Canada throughout the taxation year. All foreign exploration and development expenses incurred by a Canadian corporation prior to 2001 were accumulated in one global tax "pool" called the FEDE balance. FEDE expenses incurred after 2000 must be allocated to separate FRE accounts on a country-by-country basis. Foreign resource income is applied first to support the global FEDE claim.

If an FEDE pool exists, the corporation must first take an FEDE deduction that is at least equal to the available foreign resource income of the year. If the foreign resource income is less than 10% of the available FEDE, then the taxpayer may deduct an additional amount so that the maximum deduction is 10% of the FEDE balance. Unclaimed balances can be carried forward indefinitely.

The basic FRE deduction for each country is an amount comprising between 10% and 30% of the cumulative FRE balance for that country, the upper limit being restricted to the amount of available foreign resource income for that country. However, a supplemental FRE deduction may be permitted if the country limitation results in a global FRE claim of less than 30%. With this supplemental deduction, total FRE deductions are allowed to reach up to a maximum of 30% of a taxpayer’s total cumulative FRE balances to the extent of available global foreign resource income.

FEDE and FRE include, subject to applicable date restrictions:

  1. Expenses incurred in respect of exploration and drilling for petroleum and gas outside Canada;
  2. Exploration and development expenses incurred in searching for minerals outside Canada;
  3. The cost of acquiring foreign resource properties;
  4. Annual foreign lease rental payments; and
  5. The “at risk” portion of the corporation’s share of any of the above expenses from a partnership.

Canadian Development Expenses (CDE)

CDE consist of expenses incurred in:

  • Drilling, converting, and completing an oil well in Canada; or
  • Sinking or excavating a mine shaft, main haulage way, or similar underground work for a mine in a mineral resource in Canada built or excavated after the mine came into production; and
  • Pre-production mine development expenses after 2017 as proposed in the federal budget 2013.

The cost of any Canadian mineral property, or of any right to or interest in any such property, also qualifies as a CDE.

CDE are accumulated in a pool called Cumulative Canadian Development Expenses (CCDE). The taxpayer can deduct up to 30% of the unclaimed balance in that pool at the end of each year. Unclaimed balances may be carried forward indefinitely.

In the case where a corporation does not have taxable income against which to claim CDE, the CDE can be used to create a non-capital loss. This non-capital loss can then be carried backward or forward to taxation years where the corporation can use the deduction to reduce its taxable income.

Canadian Oil and Gas Property Expense (COGPE)

A COGPE is the cost of acquiring an oil or gas well; an interest or right to explore, drill, or extract petroleum or natural gas; or a qualifying interest or right in oil or gas production (excluding Crown royalties).

Budget 2011 proposed to treat the cost of oil sands leases and other oil sands resource property as Canadian Oil and Gas Property Expense (COGPE) rather than Canadian Development Expense (CDE) as in the past. This change would be effective for acquisitions made on or after the Budget Day, March 22, 2011.

The tax system allows an optional deduction of this cost up to 10% per year on a declining balance basis.

The COGPE account is credited when any disposition takes place, but a taxpayer's negative COGPE account may be offset by the taxpayer's CDE account. Any negative COGPE account still remaining is treated as resource income.

Mine Reclamation Funds

Reclamation of a mine site generally involves the dismantling of buildings and structures and the stabilization and re-vegetation of mine waste dumps and tailings impound areas. This work may begin during the operating life of the mine and is usually completed within five years of its closure. These activities represent significant, but generally predictable, costs for the mining company. Legal obligations for mining companies vary between provinces and territories. They may include pre-planning of the technical work of reclamation, decommissioning and environmental protection following mine closure, and providing financial assurances to the provinces/territories that reclamation work will be carried out to an acceptable standard.

In cases where a mine site owned by a single company is likely to be facing reclamation requirements for a long time, some provinces/territories now require the firms involved to contribute to trust funds. Contributions to the fund would normally be structured as a series of payments over a specific time period.

Under the former tax treatment for mine reclamation costs, a deduction was allowed only after monies had actually been spent on reclamation. The February 1994 Budget amended the income tax rules related to mine reclamation as follows:

  • A deduction will be permitted for contributions to qualifying mine reclamation trusts made after February 22, 1994, pursuant to a statutory obligation to make such contributions;
  • Income earned in such trusts will be subject to tax each year;
  • All withdrawals from the trust will be included in computing the recipient's income for tax purposes;
  • Reclamation costs will continue to be fully deductible at the time incurred; and
  • Contributions, trust earnings, and withdrawals will not be taken into account for the purposes of determining a taxpayer's resource allowance.

In the 1997 Federal Budget, the rules for Qualifying Environmental Trusts (QET) were extended to industrial mineral quarries and waste disposal sites.

The 2011 Federal Budget further introduced the following four changes to the QET rules:

  • To extend the QET rules to trusts that are required to be established to deal with pipeline abandonment costs, in response to the requirement of the National Energy Board (NEB) in 2009;
  • To expand the QET rules to include trusts that are required to be maintained by an order of a tribunal;
  • To expand the range of permitted investments by QET to include securities listed on a designated stock exchange, investment-grade debt obligations, and debt obligations of entities listed on a designated stock exchange in Canada, or of a corporation listed on a designated stock exchange outside of Canada; and
  • To set the rate of tax payable by QET under Part XII.4 to the general income tax rate applicable to corporations less the total of the general rate reduction percentage and the provincial abatement. For 2012, this rate is expected to be 25%.

All of the measures proposed in the 2011 Budget will apply to 2012 and subsequent taxation years.

To clarify the tax treatment of amounts set aside to meet future reclamation obligations, Budget 2013, on the other hand, proposes to amend the Income Tax Act to ensure that the reserve for future services under paragraph 20(1)(m) cannot be used by tax payers with respect to amounts received for the purpose of funding future reclamation obligations, effective on the Budget Day (March 21, 2013).

Resource Allowance

The resource allowance was a feature of the federal taxation regime for resource income that has been in place from 1976 to 2003. As indicated in Budget 2003, and as described in the March 2003 technical paper entitled Improving the Income Taxation of the Resource Sector in Canada, the reform of the federal income taxation of the resource sector provided, among other changes, the gradual replacement of the 25% resource allowance by a deduction for corporate income tax purposes of all payments of provincial and other Crown royalties and mining taxes. The phase-out of the resource allowance was completed on January 1, 2007.

For taxation years prior to 2004, a taxpayer (either a corporation or an individual) can claim a resource allowance of 25% of his/her "resource profits" in computing his/her taxable income. This allowances was to partially compensate for the non-deductibility of provincial/territorial mining taxes and provincial oil and gas royalties, which took place in 1974. The resource allowance adjustment resulted in mining companies having only 75% of resource profits being subject to tax.

Resource profits were computed by deducting the operating expenses, capital cost allowances, and all other expenses that may be reasonably attributed to resource income, which is income derived from the production and processing of hydrocarbons and mineral resources. Resource income also included the smelting and refining of mineral resources to a stage not beyond the prime metal stage, the processing of tar sands or heavy oil not beyond the crude oil stage, and after 1996, the processing of natural gas. However, income from refining crude petroleum or metal fabrication, from the processing of foreign ore, or related to the disposition of a resource property, was excluded from resource income.

Resource profits were computed without consideration of interest and other financing charges, Canadian exploration expenses (CEE), Canadian development expenses (CDE), foreign resource expenses (FRE and FEDE), the acquisition cost of resource property (CDE and COGPE) and any earned depletion based on pre-1989 eligible costs. All the costs specified above were deducted after the resource allowance calculation, which meant that the resource profit was artificially overstated for the purposes of calculating the resource allowance. There were two important implications to this structural characteristic of the resource allowance mechanism:

  • First, the portion of income sheltered from income tax by the resource allowance was larger than would have been the case if all cost items had been included in the computation of resource profits. These extra tax savings resulted in an effective income tax rate that was lower than 75% of the statutory rate, which was the result that one would have expected at first glance for resource companies.
  • Second, some costs were subject to a preferential tax treatment relative to other costs that a resource company could deduct. This was because the cost items that are deductible after the resource allowance are deducted at the full statutory income tax rate, while other resource-related costs were effectively deducted at only 75% of that rate.

To illustrate the significance of this effect, the following table compares the effective tax rates for two companies with the same revenues and the same costs for the same accounting income, but where the costs are in two different categories. Note that the federal income tax rate of 29.12% is used in the example to reflect the situation when that rate was applicable.

Table 1. Significance of Resource Allowance
Calculation Steps Company A Company B
1. Resource Profit (Before CCA) $2 000 $2 000
2. Capital Cost Allowance $1 000 $0
3. Resource Allowance {[(1)-(2)]*25%} $250 $500
4. Exploration Expenses $0 $1 000
5. Taxable Income [(1)-(2)-(3)-(4)] $750 $500
6. Federal Income Tax (29.12%) $218 $146
7. Accounting Income Before Tax $1 000 $1 000
8. Federal Income Tax as % of Accounting Income 21.84% 14.56%

As can be seen from the Taxable Income, each $1000 of cost incurred with respect to the privileged category (deducted after the resource allowance) earns an extra $250 deduction compared to an equivalent cost incurred with respect to a category deducted before the resource allowance. The policy rationale for this special treatment was to provide extra tax relief for those categories of costs incurred in high-risk activities such as exploration. In the case of interest expenses, the special treatment owned its origin to the fact that such expenses are not deductible for mining tax purposes and, therefore, it was argued that interest expenses should not reduce the amount of tax relief provided in lieu of mining taxes paid.

Another result of the resource allowance structure was to allow the provinces or territories room to impose or change royalties or mining taxes on the production of natural resources while maintaining the integrity of the federal income tax base. Provincial/territorial mining charges or royalties may have increased or decreased without affecting the amount deductible as the resource allowance.

For the mining sector, the global amount of resource allowance deducted over years for federal income tax purposes has exceeded actual provincial/territorial royalties paid. The resource allowance thus provided considerably greater benefits, in aggregate, to the industry than the costs arising from the disallowance of provincial/territorial mining taxes. One explanation for this extra benefit is the fact that the resource allowance was calculated in reference to profits from not only mineral extraction, as is the case for provincial/territorial mining taxes, but also from mineral processing. This situation followed a policy decision to deny manufacturing and processing (M&P) tax treatment to mineral-processing activities. These activities are similar to M&P, but were instead classified as resource activities. The provision of the resource allowance was similar in impact to the value of the lower rate that would have been applied to such income if it had been treated as M&P.

The 25% resource allowance reduced the general statutory federal income tax rate from 28% (i.e., 38% less 10% provincial/territorial abatement) to an effective rate of 21%. After factoring in the 4% corporate surtax, the income was taxed at an effective rate of 21.84%.

Table 2. Federal Income Tax Rate: General vs. Manufacturing and Processing
Calculation Steps General Income M&P
Basic Statutory Rate 38% 38%
Less: Provincial/Territorial Abatement 10% 10%
Equals 28% 28%
Less: 25% Resource Allowance 7% -
Plus: 4% Surtax 0.84% 1.12%
Less: M&P Tax Credit - 7%
Adjusted Federal Tax Rates 21.84% 22.12%

The Minister of Finance launched a review of the resource allowance provision of the Income Tax Act in the February 1995 Federal Budget. That review process involved extensive consultations with the provinces/territories and industry. Measures were announced in the March 1996 Budget to clarify and tighten the resource allowance mechanism while retaining most of its key features. The new measures have been positively received by the mining industry and the provinces/territories. The most significant change clarified that a deduction claimed in computing income will result in a reduction of resource profits for resource allowance purposes unless the expense can be reasonably allocated to a non-resource activity. In addition, rules were adopted to treat resource losses in a fashion symmetrical with resource profits. Prior to these changes, resource losses provided tax relief at a tax rate higher than that applied to resource profits. In short, the resource allowance review resulted in a mechanism that is less vulnerable to misinterpretations by companies and, at the same time, keeps intact the incentive provided by the resource allowance.

Mining Depletion

Prior to 1990, mining corporations were able to deduct an allowance (the lesser of 25% of resource profits or the amount of earned depletion) for earned depletion, which could be accumulated in an earned depletion pool. While additions to the earned depletion pool were not permitted after December 31, 1989, mining corporations can still use the unclaimed balance from its depletion pool to reduce taxable income in future years.

Flow-Through Shares (FTS) and the Mineral Exploration Tax Credit (METC)

A flow-through share (FTS) is a mechanism that allows a principal business corporation to obtain financing for expenditures on mineral exploration and development in Canada. By issuing flow-through shares, a company can renounce, or flow through, certain expenses to the purchaser of the share. These expenses are deemed to be incurred by the investor and not the corporation, and reduce income subject to tax in the hands of the investor (which can be an individual or another corporation). The FTS mechanism, therefore, not only allows costs to be claimed sooner than they would have been if they were retained by the corporation incurring them, but also to be claimed against income subject to higher rates.

For the individual investors, the advantages of investing in flow-through shares can be twofold: (i) they receive a 100% tax deduction for the amount of money they invested in the shares, plus a 15% tax credit in the case of an eligible expense; and (ii) they stand to see the value of their investment appreciate in the event of successful exploration. The flow-through share mechanism has been a longstanding and unique feature of the Canadian taxation regime for mining and oil and gas.

Flow-through shares have financed a significant amount of the increasing exploration activity in Canada in recent years. See Overview of Trends in Canadian Mineral Exploration 2009 for details.

Quite often, flow-through shares provide exposure to the most interesting exploration plays in the country. Many of the companies recently exploring in the neighbourhood of the Voisey's Bay nickel-copper deposit in Labrador, in the Northwest Territories for diamonds, and in the Ring of Fire area in Ontario, are using flow-through shares to finance their activities.

Many mines have been found with the help of flow-through money. Some well-known examples include the Louvicourt copper-zinc mine, the Eskay Creek gold-silver mine, the Troilus gold project, and the Kemess South gold-copper project.

FTS issuing corporations need not be Canadian corporations, but they must be Canadian taxpayers that incur the expenses in Canada on qualified activities. Resource expenses that may be flowed through include Canadian Exploration Expenses (CEE) and certain Canadian Development Expenses (CDE). Of course, to be able to use the transferred deductions, FTS investors must be Canadian taxpayers. The Frequently Asked Questions section contains a more detailed explanation about the functioning of the FTS renunciation rules.

A special provision introduced in 1992 allows certain development expenses to be treated as CEE in the hands of an FTS investor to assist FTS financing by junior oil and gas companies. Consequently, an FTS investor is entitled to a 100% write-off for CEE, rather than only a 30% write-off for CDE.

Following the 1996 Budget, the amount of oil and gas development cost that can be reclassified as CEE under an FTS agreement was reduced from $2 million to $1 million per year. This entitlement, moreover, is restricted to issuing corporations that have less than $15 million in taxable capital employed in Canada. Other tightening measures were introduced to ensure that the FTS mechanism is used only to finance more risky expenditures, as was originally intended. Development expenses for the mining industry that relate to the cost of acquiring mining properties, COGPE, and "off-the-shelf" seismic costs are no longer transferable to FTS investors.

The 1996 Budget also changed the FTS rules to allow more time for companies to undertake certain resource expenditures related to flow-through share financing. This modification to the so-called "look-back" rule took place to allow exploration expenditures renounced to investors to be incurred by the issuer up to a full year (rather than only 60 days) after the end of the calendar year in which the funds were raised.

In the Economic Statement and Budget Update of October 18, 2000, as a further incentive to stimulate mining exploration and development, the federal government established a temporary 15% Mineral Exploration Tax Credit (METC) in addition to the regular tax deduction associated with flow-through share investments. See Mineral Exploration Tax Credit section for details.

The recent budgets, however, made a number of changes to the FTS provisions. Detailed changes are presented in the sections above.