Overview of the Critical Mineral Exploration Tax Credit
Flow Through Shares and the Critical Mineral Exploration Tax Credit
In April 2022, the Canadian government announced as part of the 2022 Budget that it would be introducing a 30% Critical Mineral Exploration Tax Credit (CMETC). Bill C-32, which included amendments to the Income Tax Act providing for the new 30% CMETC, received Royal Assent on December 15, 2022.
The CMETC offers a 30% tax credit to people investing in flow-through shares in mining companies, where certain eligibility criteria, discussed below, is met. The new tax credit is double the Mineral Exploration Tax Credit (METC), which was introduced in October 2000 and allows investors to claim a 15% tax credit for eligible exploration expenses.
The CMETC is an alternative to the METC, and investors claiming the CMETC may not claim the METC as an additional tax credit.
The new 30% tax credit provides an increased incentive for people to invest in companies’ exploration activities for specified critical minerals that are necessary to develop clean
technologies. For example, critical minerals are needed to develop technologies such as solar panels and wind turbines. This initiative is part of the government’s objective of developing clean technologies in hopes of one day achieving a net-zero economy.
The CMETC is applicable to investments in flow-through shares. Flow-through shares provide a mechanism by which Canadian mining companies can issue shares to investors at a higher price than the investor would normally pay, if certain requirements are met. Mining companies may issue flow-through shares to investors by renouncing their Canadian exploration expenses (CEE) deduction, which allows mining companies to deduct 100% of these expenses from their income. When mining companies renounce their CEE deduction, their Investors can claim the CEE deduction to reduce their own income taxes. In order to claim CEE, the expense must relate to a mineral resource.
Further, to be eligible for the CMETC, certain requirements must be met. The expenses must be incurred as the result of exploration activities that relate to specified ‘critical minerals’. The following critical minerals have been identified as qualifying for the CMETC: copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium vanadium, tellurium, magnesium, zinc, platinum group metals, and uranium. Furthermore, to qualify for the tax credit, the critical mineral must meet the definition of
‘mineral resource’ or receive certification from the Minister of Natural Resources. In 2023, the federal Budget amended the definition of ‘mineral resource’ in the Income Tax Act to include lithium from brines. This will allow companies to renounce CEE deductions for expenses relating to lithium from brines in favour of their investors in order to issue flow-through shares.
The exploration activities must primarily target critical minerals, meaning the mining company must expect that at least 50% of the minerals that are the subject of the exploration activity are critical minerals.
A qualified professional engineer or professional geologist must certify in prescribed form T100A-CERT, that the expense is incurred under an exploration that targets critical minerals. The certification must be completed within 12 months of the flow-share agreement having been made. A ‘qualified professional engineer or professional geologist’ is defined in the legislation. Furthermore, the flow-through share agreement for which the tax credit is being claimed must be made after April 7, 2022, and on or before March 31, 2027.
This new tax credit has the potential to increase investment in projects that target specific minerals which can be used for the development of clean technology. Ultimately, this initiative will help Canada move towards having a net-zero economy, a goal which the country has committed to realizing by 2050.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.