Backgrounder: Mineral Exploration Tax Credit for Flow-Through Share Investors

Flow-through shares allow resource companies to renounce or "flow through" tax expenses associated with their Canadian exploration activities to investors, who can deduct the expenses in calculating their own taxable income. The Mineral Exploration Tax Credit provides an additional income tax benefit for individuals who invest in mining flow-through shares, which augments the tax benefits associated with the deductions that are flowed through. This credit is equal to 15 per cent of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. Like flow-through shares, the credit facilitates the raising of equity to fund exploration by enabling companies to issue shares at a premium.

The Government proposes to extend eligibility for the Mineral Exploration Tax Credit for an additional year, to flow-through share agreements entered into on or before March 31, 2018. Under the existing "look-back" rule, funds raised in one calendar year with the benefit of the credit can be spent on eligible exploration up to the end of the following calendar year. Therefore, for example, funds raised with the credit during the first three months of 2018 can support eligible exploration until the end of 2019.

Mineral exploration, as well as new mining and related processing activities 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 targets and actions in 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.

It is estimated that the extension of the credit will help junior exploration companies to raise more equity and result in a net tax reduction of $30 million over the 2017–18 to 2018–19 period.

Estimated Cost of Extending the Mineral Exploration Tax Credit
($ millions)
  2017–18 2018–19 2019–20 2020–21 2021–22 Total
Extension to March 31, 2018   45 (15)1 - - - 30

1 In the year a company issuing flow-through shares transfers eligible expenses to an individual shareholder, the shareholder is entitled to claim both a deduction for the expenses flowed through and the 15-per-cent Mineral Exploration Tax Credit. Once the credit is received upon the filing of the individual's tax return in the following year, the deduction associated with the portion of the expense that was effectively paid for by the credit is reversed, resulting in an income inclusion for the individual in the following year.