On March 22, 2016, Canada’s Liberal party released its first Federal Budget since taking office last year, and despite projecting a staggering deficit of approximately $30 billion, the Budget brings welcome news for the Canadian mining industry in both what in contains, and what it does not.
Business as usual with flow-through shares
For instance, the 2016 Budget proposes to extend the availability of the Federal Mineral Exploration Tax Credit (METC) another year. The METC is central to the flow-through share tax regime as it provides investors with the ability to claim a 15 per cent tax credit in respect of certain “grassroots” mineral exploration expenses incurred by the issuer of flow-through shares.
The METC is in addition to the ability of the investor to personally deduct expenses renounced by the issuer. The METC thus provides a significant additional incentive to investment in the capital- intensive industry of grassroots Canadian mineral exploration. The METC was otherwise set to expire on March 31, 2016, and its renewal demonstrates a continued strong level of governmental support for tax-efficient financing of junior Canadian mining companies.
There was some speculation leading up to Budget 2016 that the Liberals might further tighten the rules concerning the nature of certain mining expenses that qualify for renunciation to holders of flow-through shares.
As background, certain expenses that qualify as a “Canadian exploration expense” (CEE) are generally 100 per cent deductible to the holder of a flow-through share in the year in which they are renounced, whereas expenses that qualify as a “Canadian development expense” (CDE) are generally deductible to such holder on a 30 per cent declining balance basis.
Recall that in Budget 2013, in an effort to save several million dollars of federal tax revenue, the former Conservative government amended the Income Tax Act (Canada) to phase in a recharacterization of certain pre-production mining expenses (which had up to then qualified as CEE) as CDE.
This was a material change to the flowthrough share regime for certain grassroots Canadian mining companies that were anticipating a shift into the production phase.
The positive news is that Budget 2016 proposes no further changes to the characterization of expenses as either CEE or CDE.
Employee Stock Options
Stock options are an integral part of the compensation packages offered by many Canadian companies, including in the mining industry. The attractiveness of stock options is enhanced by their current tax treatment; properly structured options can generally provide tax deferral opportunities and favourable tax rates that are not available in respect of cash or certain other forms of equity compensation.
As a result of comments made by the Liberals in their 2015 election platform, there was significant concern leading up to Budget 2016 that the stock option tax regime would be overhauled by implementing a fairly low cap on the amount of stock options that could benefit from reduced tax rates.
In other words, many option holders who thought they would be taxed at rates equivalent to capital gains could instead be subject to tax at full income rates.
These concerns were sufficient enough for some option holders to take proactive steps prior to Budget 2016 to exercise in-the-money options and lock in preferred tax rates on the resulting benefit rather than risk losing this benefit as a result of the Budget.
Thankfully, no such changes materialized in Budget 2016. Rather, the Liberals announced following the release of the Budget that, based on consultations with Canadian businesses, they no longer plan to limit benefits on employee stock options. Accordingly, it is “business as usual” for employee stock options from a tax perspective.
Budget 2016 contains several new funding measures relating to the research, use and development of “clean technology,” as well as strengthening the environmental assessment process including more efficient consultations with affected communities.
Matthew Peters is a tax partner in the Toronto office of Bennett Jones specializing in cross-border M&A and financing.