Canada's Mining IndustrySeeks Exemptionfrom Proposed Capital Gains Tax Hike

Canada's mining industry urges exemption from proposed capital gains tax increase, citing potential hindrance to junior miners' ability to raise funds for critical mineral exploration. The industry argues the hike would reduce the value of the Mineral Exploration Tax Credit, used to raise equity for exploration.

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Bijay Laxmi
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Canada's Mining IndustrySeeks Exemptionfrom Proposed Capital Gains Tax Hike

Canada's Mining IndustrySeeks Exemptionfrom Proposed Capital Gains Tax Hike

Canada's mining industry is urging the federal government to exempt them from the proposed increase to capital gains taxes, warning that the hike will hinder junior miners' ability to raise funds for critical mineral exploration. The proposed budget by Finance Minister Chrystia Freeland includes a measure to raise the capital gains tax inclusion rate to two-thirds from one-half.

Why this matters: The availability of critical minerals like copper, nickel, and lithium is crucial for the transition to a low-carbon economy, and any hindrance to their exploration and development could have far-reaching consequences for the environment and the economy. A decline in mineral exploration could also lead to a shortage of these essential resources, affecting various industries and consumers worldwide.

The tax increase would apply to all gains made by corporations and trusts, and to individual taxpayers on gains over C$250,000 (about $183,000) in a year. The mining industry argues that the hike would "significantly reduce" the value of the Mineral Exploration Tax Credit (METC), a measure designed to help companies raise money to explore for critical minerals like copper, nickel, and lithium.

Junior miners, responsible for many of the world's mineral discoveries, rely heavily on flow-through shares to raise equity. These shares allow companies to pass on certain expense deductions to investors, reducing their income tax bills. "Increasing the capital gains rate effectively negates the tax benefit associated with the METC," said Pierre Gratton, president of the Mining Association of Canada.

The mining association estimates that 90% of junior exploration in Canada is financed with flow-through shares, and that the new capital gains measures could affect 70% of it. Miners raised C$2.6 billion using this vehicle over 2021 and 2022. "It's exploration that we need if we're going to find the next Voisey's Bay or Raglan Mine, to provide the nickel and cobalt that automakers like Honda and Volkswagen need," Gratton emphasized.

The Mining Association of Canada met with officials in Finance Minister Chrystia Freeland's department last week to make the case for an exemption from the capital gains increase. "Our sense is that the Department of Finance didn't connect the dots," Gratton said. "We think there are ways to make the credit work that does not in any way compromise their budget numbers."

Katherine Cuplinskas, a spokesperson for the finance minister, stated that the government is "investing in our exploration mining sector" through the 15% Mineral Exploration Tax Credit and the 30% Critical Mineral Exploration Tax Credit, but did not specifically address the mining association's concerns about the impact of the capital gains tax hike on junior miners' ability to raise funds.

The mining industry's push for an exemption from the proposed capital gains tax increase highlights the critical role that junior miners play in discovering new mineral deposits and the challenges they face in attracting capital due to the high-risk nature of exploration. With flow-through shares accounting for the vast majority of financing for these projects, the industry warns that the tax hike could stifle exploration and development, ultimately affecting the entire mining sector and the supply of critical minerals needed for the transition to a low-carbon economy.