Budget 2012: changes to the taxation of resource industries 

publication 

March 2012

Tax Bulletin

Budget 2012 proposes a number of significant and, in some ways, surprising tax changes affecting the Canadian resource sector.

First, as expected, Budget 2012 proposes to extend the "super flow-through share" program for another year in order to continue to promote the exploration and development of mineral resources in Canada. Second, the Government is proposing to phase out a number of tax incentives for the resource sector, including the 10% tax credit for certain mineral exploration and development expenses and the Atlantic Investment Tax Credit (the "AITC") for oil, gas and mining activities. These latter changes are intended to improve the neutrality of the tax system between resource and other industries and, in the case of the change to the AITC, to comply with Canada's G-20 commitments to phase out fossil fuel subsidies.

super flow-through share program

Budget 2012 proposes to extend the "super flow-through share" program for an additional year. The super flow-through share program was initially introduced in October 2000 in response to a severe downturn in mineral exploration in Canada. The program had expired at the end of 2005 and was re-introduced in the 2006 Budget in respect of flow-through shares issued pursuant to agreements made after May 1, 2006 and on or before March 31, 2007. The program was extended for additional one-year periods in the 2007, 2008, 2009, 2010 and 2011 Budgets.

Canada's flow-through and super flow-through share programs provide tax incentives to promote the exploration and development of mineral resources in Canada, particularly by encouraging new equity investment in junior mining companies. Under Canada's flow-through share program, a company is permitted to renounce or "flow-through" certain expenses associated with its Canadian exploration activities to investors. In turn, investors can generally deduct such expenses in calculating their own taxable income.

The super flow-through share program provides an additional benefit to those who invest in flow-through shares. Under this program, an investor may claim a 15% tax credit in respect of certain grassroots exploration expenses incurred by the issuer of the shares in Canada and renounced to the flow-through shareholder. The tax credit may be applied to reduce certain federal income taxes otherwise payable by the investor. Grassroots mining expenditures include expenses incurred in conducting certain mining exploration activities for the purpose of determining the existence, location, extent or quality of a mineral resource.

Budget 2012 proposes to extend the super flow-through share program to apply in respect of flow-through share agreements entered into on or before March 31, 2013. Under a "look-back" rule, funds raised under the terms of the program in the first three months of 2013 may be used to support eligible exploration up to the end of 2014.

corporate mineral exploration and development tax credit

Taxable Canadian corporations are currently entitled to claim a tax credit at the rate of 10% on certain "pre-production mining expenditures" in respect of qualifying mineral resources. Eligible expenditures may include (i) expenses incurred for the purpose of determining the existence, location, extent or quality of a qualifying mineral resource in Canada (such as expenses incurred in the course of prospecting, surveying, drilling, and preliminary sampling) ("Exploration Expenses"), and (ii) certain pre-production expenses incurred in bringing a new mine for a qualifying mineral resource in Canada into production in reasonable commercial quantities and incurred before the new mine comes into production in such quantities (including expenses for clearing, removing overburden, sinking a mine shaft, or constructing an underground entry) ("Development Expenses").

Budget 2012 proposes to phase out this tax credit completely by 2016. In respect of Exploration Expenses, the credit will be reduced to 5% of expenses incurred in 2013 and will not be available in respect of expenses incurred after 2013. For Development Expenses, the credit will be reduced to 7% of expenses incurred in 2014, 4% of expenses incurred in 2015, and will not be available in respect of expenses incurred after 2015.

In recognition of the long timelines involved in developing mines, the 10% tax credit will continue to be available to a taxpayer in respect of Development Expenses incurred before 2016 either (i) under a written agreement entered into by the taxpayer before March 29, 2012, or (ii) as part of the development of a new mine where either the construction of the new mine, or the engineering and design work for the construction of the new mine (as evidenced in writing) was started by, or on behalf of, the taxpayer before March 29, 2012. Activities such as obtaining permits or regulatory approvals, conducting environmental assessments, community consultations, impact benefit studies and similar activities will not be considered construction or engineering or design work for these purposes.

Atlantic Investment Tax Credit

Taxpayers are currently entitled to claim a tax credit equal to 10% of the capital cost of certain new buildings, machinery and equipment used primarily in certain industries, including the mining, oil and gas industries, in the Atlantic provinces, the Gaspé Peninsula and their associated offshore regions.

As part of the Government's commitment to eliminate subsidies for fossil fuels, Budget 2012 proposes to phase out the AITC for assets used in oil, gas and mining activities ("Resource Assets") starting in 2014. Subject to certain transitional rules, the AITC will be reduced to 5% in respect of Resource Assets acquired in 2014 and 2015 and will not be available in respect of Resource Assets acquired after 2015.

In light of the long timelines for oil, gas and mining projects, Budget 2012 proposes transitional rules for Resource Assets acquired before 2017 either (i) pursuant to an agreement in writing entered into before March 29, 2012, or (ii) as part of the discrete expansion phase of a project where either construction, or the engineering and design work for construction (as evidenced in writing), of the phase of the project was started by, or on behalf of, the taxpayer before March 29, 2012. Taxpayers will be entitled to claim the AITC at a rate of 10% for Resource Assets acquired before 2017 that are subject to these transitional rules.

by Peter Botz, Michael Friedman and Carl Irvine

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2012