Deputy Prime Minister and Minister of Finance Chrystia Freeland speaks at a press conference about changes to capital gains tax legislation, on Parliament Hill in Ottawa, on June 10.Patrick Doyle/Reuters
The Canadian mining industry is optimistic that Ottawa will carve out an exception for the sector around coming changes to the capital-gains tax that it hopes will pre-empt a large drop in financings.
As of June 25, capital gains made by Canadian investors are set to be taxed at two thirds, up from one half, for gains above $250,000. Owing to a tax quirk associated when selling flow-through shares, the pending changes will deter high-net-worth individuals from investing in the mining sector, according to Pierre Gratton, president of the Mining Association of Canada.
But Mr. Gratton said the latest language coming out of Ottawa is encouraging. When Finance Minister Chrystia Freeland tabled a notice of ways and means motion for the capital-gains tax changes in Parliament on Monday, the federal government also said it intends to provide more information to ensure Canada’s mining exploration companies can thrive.
“They’re going to do something. We just don’t know what yet,” Mr. Gratton said of the release.
Katherine Cuplinskas, press secretary for Ms. Freeland, in an e-mail to The Globe and Mail acknowledged that the junior mining sector has asked questions of the changes to the capital-gains inclusion rate.
“Clarifications to those questions are forthcoming, and we are in touch with the mining sector,” she said.
On Tuesday, the Conservatives voted against the proposed capital-gains tax changes, with leader Pierre Poilievre promising that a government led by him would create a “Bring it Home Tax Cut.”
However, the motion tabled by Ms. Freeland still passed 208 to 118, with NDP and Bloc Québécois MPs voting with the Liberal government.
After the tax changes were announced in this year’s federal budget, the mining industry initially predicted it would have a detrimental impact on the ability of small resource companies to raise exploration capital.
That’s because a large chunk of money the sector raises is from investors taking advantage of flow-through shares, in conjunction with the mineral exploration tax credit, or METC. Both boost the returns investors gain from investing in junior resource stocks by ultimately reducing their tax bills.
Flow-through shares allow investors to deduct the entire amount invested in resource stocks from their income. The METC allows investors to take advantage of a further 15-per-cent tax credit.
But the advantages stemming from the current capital-gains tax regime are set to be eroded so much that many high-net-worth investors, which the industry relies on for anchor capital in financing rounds, will no longer get any kind of tax break on their investment, according to Mr. Gratton.
Over the past few months, Mr. Gratton has been urging Ottawa to carve out an exception for the exploration sector around the capital-gains tax changes that will keep high-net-worth investors from fleeing.
Among the ideas he has proposed is raising the cost base for flow through share sales and/or changing the capital-gains inclusion rate for investors who donate their resource shares to charities.
When investors sell flow through shares, they must report their cost base as $0, meaning that even a loss is considered as a capital gain for tax purposes.
Mr. Gratton used the example of a high-net-worth investor selling one million shares that originally cost $1 apiece. If the investor sells at $0.75 a share, the Canada Revenue Agency treats it as a $750,000 gain.
Under the existing regime, 50 per cent of the gain, or $375,000, would be added to the investor’s taxable income. But if the new regime takes effect, 50 per cent of the first $250,000 will be added to income, and two thirds of the remaining $500,000, for a total of roughly $458,000.
Just over $1-billion was raised in Canada in 2022 from flow through shares, according to the Prospectors and Developers Association of Canada. In 2021, $1.5-billion was raised.
Canadian miners are navigating an ever-changing landscape in funding. In late 2022, Ottawa essentially shut the door to any new investment from China into the Canadian critical minerals sector. However, governments are also funnelling more money directly into mining companies.
Last month, Ontario cobalt developer Fortune Minerals Ltd. and Quebec graphite exploration company Lomiko Metals Inc. were awarded $32.4-million in combined funding by the U.S. and Canadian governments.