Archived - Backgrounder - Canadian Exploration Expense Treatment of Environmental Studies and Community Consultations

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In the mining and oil and gas sectors, many expenses related to exploration in Canada are classified as Canadian exploration expenses (CEE) for income tax purposes. Such expenses are 100 per cent deductible in the year incurred. In addition, corporations, particularly those that are not currently taxable and are therefore unable to obtain a current benefit from a tax deduction, may choose to renounce or “flow through” the expenses to investors under a flow-through share agreement. Flow-through shares facilitate the raising of equity to fund exploration by enabling corporations to issue shares at a premium.

CEE includes expenses incurred for the purpose of determining the existence, location, extent or quality of a mineral resource or an accumulation of petroleum or natural gas in Canada. In addition to the expenses associated with the physical exploration for the resource, eligible expenses can include the cost of certain environmental studies and community consultations that are carried out for the purpose of facilitating the physical exploration.

Provinces and territories are increasingly requiring mining, oil and gas companies to undertake environmental studies and community consultations (e.g., with local communities, neighbouring landowners, traditional and recreational users of the land, etc.) as a pre-condition to obtaining a permit or licence to explore. However, where environmental studies and community consultations are a pre-condition to obtaining such a permit or licence, the expenses may be treated as part of the cost of the permit or licence. The cost of obtaining a permit or licence does not qualify for CEE treatment and is not eligible for flow-through share treatment. As a result, certain expenses related to environmental studies and community consultations may currently be treated differently for tax purposes from one jurisdiction to another depending upon the requirements of the regulator.

To ensure the appropriate treatment of such expenses, the Government proposes to modify the tax rules to provide that CEE treatment is not denied for the cost of otherwise eligible environmental studies and community consultations solely because they are a pre-condition to obtaining an exploration permit or licence.

This measure will facilitate resource exploration in Canada. Exploration, as well as the resource development and processing activity that could follow from successful exploration efforts, can be associated with a variety of environmental impacts to soil, water and air and, as a result, could have an impact on the goals of the Federal Sustainable Development Strategy. All such activity, however, is subject to applicable federal and provincial environmental regulations, including project-specific environmental assessments where required. Indeed, the expenses at issue can help mitigate any potential negative impacts on the environment and local communities.

This measure will apply to expenses incurred after February 2015. It is estimated that it will result in a reduction of federal revenues in the order of $21 million over the next five years.

Cost of Changes to Canadian Exploration Expense Treatment
($ millions)
  2014–15 2015–16 2016–17 2017–18 2018–19 2019–20 Total
Canadian Exploration Expense Treatment of Environmental Studies and Community Consultations   s 4 4 4 4 5 21

Note [added March 19, 2015]: The letter "s" (“small”) indicates a small amount (less than $1 million).