Tax experts share disappointment at finding tax policy changes buried in budget footnotes

“Announcing tax policy changes in budget footnotes is not an appropriate way to inform taxpayers or their advisor,” said John Oakey of Chartered Professional Accountants of Canada. Photo by Justin Tang/The Canadian Press/Postmedia files

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Last week’s federal budget contained some changes to the flow-through share regime: some positive, and some negative. Before reviewing the changes, here’s a primer on how flow-through shares work.

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Flow-through shares allow corporations to renounce, or essentially “flow through,” Canadian exploration expenses (CEE), including Canadian renewable and conservation expenses (CRCE), and Canadian development expenses (CDE) to investors. Investors can then deduct these expenses in calculating their own taxable income (at a 100 per cent rate for CEE, including CRCE, and at a 30 per cent rate for CDE).

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The Critical Mineral Exploration Tax Credit (CMETC) provides an additional income tax benefit for individuals who invest in eligible flow-through shares, and is equal to 30 per cent of specified mineral exploration expenses incurred in Canada, which are then renounced to flow-through share investors. Currently, the following critical minerals are eligible for the CMETC: nickel, cobalt, graphite, copper, rare earth elements, vanadium, tellurium, gallium, scandium, titanium, magnesium, zinc, platinum group metals, uranium and lithium.

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The federal budget proposed to expand the list of critical minerals to also include: bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin and tungsten. These new rules would apply to expenses renounced under eligible flow-through share agreements entered into after the budget day, until March 31, 2027.

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But, it’s not all good news for flow-through share investors. The government is also changing the definition of CEE, which typically includes expenses incurred by a taxpayer for the purpose of determining the existence, location, extent, or “quality” of a mineral resource in Canada. The determination of a mineral resource’s “quality” for CEE purposes has historically been interpreted by the Canada Revenue Agency (CRA) as referring primarily to the resource’s underlying physical characteristics. Expenses for technical studies (which are typically undertaken to assess a mineral resource’s engineering feasibility and economic viability as a mining project, rather than its underlying physical characteristics) have traditionally been viewed by the CRA as being excluded from CEE.

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A recent decision of the Supreme Court of British Columbia, however, held that the reference to “quality” under the provincial equivalent of the federal CEE definition could be interpreted to include the economic viability, and not just the physical characteristics, of a mineral resource.

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The federal government, possibly because of this decision, is changing the law. In the budget, the government proposed to amend the Income Tax Act to clarify that expenses incurred for the purpose of determining the quality of a mineral resource in Canada do not include expenses related to determining the economic viability or engineering feasibility of the mineral resource. This change, if ultimately passed, would apply as of budget day.

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Finally, and perhaps most significantly for retail investors who purchase flow-through shares either for investment or for charitable giving, the budget noted that the government would be cancelling its August 2024 draft legislative proposal that would have allowed resource expense deductions to be 100 per cent deductible under the Alternative Minimum Tax (AMT) regime.