The Mineral Exploration Tax Credit (METC) is designed to help exploration companies raise equity funds. It can be used in addition to the regular tax deduction associated with flow-through share investments.
How Does the Mineral Exploration Tax Credit Work?
The METC is a 15% non-refundable tax credit on eligible expenses. Investors can apply it against the federal income tax that would otherwise be payable for the taxation year in which the investment was made. The credit can be carried back 3 years and carried forward 20 years. A taxpayer claiming the METC may also claim the 100% Canadian Exploration Expense (CEE) deduction, which applies for both federal and provincial/territorial income tax purposes.
Taxpayers in provinces or territories that provide additional exploration incentives may combine them with the METC, but using any tax credit offered by the provinces or territories reduces the amount of expenses that are eligible for the METC and the amount of deductible CEE.
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. For example, costs related to prospecting and carrying out geological, geophysical, or geochemical surveys conducted from or above the surface of the earth in searching for, but not limited to, a base-metal or precious-metal deposit are eligible expenses for METC treatment.
The METC is only available for expenses related to exploration carried out from or above the surface of the earth. However, a corporation may also incur expenses that qualify only for the CEE deduction. The onus is on the corporation to identify and renounce the different categories of exploration expenses for federal income tax purposes.
Benefits of Investing in 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 number of federal flow-through share-incentives are still delivered in the form of income tax deductions, whose values can vary with a taxpayer's marginal tax rate. Taxpayers’ after-tax situations will therefore depend on their province or territory of residence.
Understanding the After-Tax Cost of a $1,000 Flow-Through-Share Investment
The chart below shows the after-tax costs of a $1,000 flow-through-share investment depending on which province or territory the taxpayer lives in (top marginal tax rates for 2017).
After-Tax Cost of a $1,000 Investment in Flow-Through Shares - Top Marginal Tax Rates (for the 2017 tax year)
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 for the 2017 tax year. 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 Manitoba has the lowest after-tax cost at $295. This is followed by Quebec at $307, British Columbia at $356, Ontario at $375, Nova Scotia at $391, New Brunswick at $397, Saskatchewan at $400, Prince Edward Island at $413, Newfoundland and Labrador at $414, Yukon and Alberta at $442, the Northwest Territories at $450, and lastly, Nunavut at $472. 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.