Making the most of exploration tax credits
Ensuring the quarterly books are in the black has been a challenge for several companies in the mining sector lately, especially with dipping commodity indexes and the resulting slower economy. But if your books are potentially drifting towards the red, you need to examine what you’re doing to stem that tide.
Whether you’re in British Columbia or Newfoundland – or anywhere in between – there are some leaders and some stragglers when it comes to diversifying methods of generating income in the form of refundable and non-refundable tax credits. More and more we are seeing some of Canada’s mining leaders take advantage of the Canada Revenue Agency’s (CRA) Scientific Research & Experimental Development (SR&ED) program, saving themselves anywhere from hundreds of thousands to millions of dollars.
One way Canada’s mining leaders are maximizing their SR&ED return is by actively engaging in experimental production trials. Paraphrased from the CRA SR&ED glossary, Experimental production is defined as the output produced as a result of an experiment or a trial that is required to answer a question or required to gain a new understanding. The purpose of the production run, in which the output is experimental production, is to evaluate the technical aspects of the proposed question.
As time goes on, companies are also getting better at determining the extent of the SR&ED. They do this by identifying the specific production runs that are part of the experimental development work through specific methods of documenting their trials and performing the necessary post trial analysis to demonstrate key learnings. They’re educating their engineers, scientists, and technologists on this process and, as a result, they’re capitalizing on the beneficial SR&ED tax credits available to them. The key is to identify the potential to use the SR&ED pasrogram before you get started.
Here’s an example: imagine your company was thinking about experimenting with a new blast pattern in an area that was technologically challenging, but you weren’t sure how it would affect your overall recovery or if it was even possible to meet your objectives. So, you corner off a separate test blast section and then run the ore through various comminution operations to remove the gangue and produce an experimental concentrate. Then, you test the concentrate to see what impact your experimental tests had on the recovery. Believe it or not, performing work like this could result in valuable tax credits coming back your way if you document your process properly!
So how would something like this impact your company? The Federal Investment tax credits (ITC) for this type of work would be 15% of your claimed expenditures – with a 35% refundable credit if you are a qualified Canadian controlled private corporation. In addition, some provinces have fully refundable tax credits that vary between 5% and 20%, that can be stacked on top of the Federal credit. If your company is in a loss position, these refundable credits become extremely desirable. The nonrefundable ITCs can be carried back up to three years and forward up to 20 years.
In times like these, ensuring you’re maximizing your cash flow for your business, your shareholders and your employees is critical. The SR&ED program is a valuable tool that can help you offset the cost of innovation, and help you stay in the black.
Sean Verret, EY Manager, Business Tax Incentives.