BRIEF FROM THE PROSPECTORS &
DEVELOPERS ASSOCIATION OF CANADA
Executive Summary
This submission is presented by the Prospectors and Developers
Association of Canada (PDAC), representing Canada’s mineral exploration
industry. The PDAC is a national organization with over 8,000 members
representing the range of companies and individuals in mineral exploration and
development. Our individual members include prospectors, geoscientists,
consultants, mining executives, students and people working in the drilling,
financial, legal and other supporting fields. The association’s corporate members
include exploration and junior mining companies (small and medium-sized
enterprises or ‘SMEs’), major producing companies, and organizations providing
services to the industry.
Mineral exploration and mining are mainstays of Canada’s economy,
particularly in northern and remote regions. Canada’s mining industry accounts
for approximately 20% of Canada’s annual goods exports and generally between 3
and 4% of Canada’s GDP. The industry employs over 300,000 Canadians in mineral
extraction, processing and manufacturing. However, the mineral reserves which
sustain mining have fallen dramatically over the past 25 years, threatening the
future of the industry. The only way to replace the reserves is by mineral
exploration (research and development). It is essential that policies initiated
by the federal government to encourage exploration continue and that tax rules
are reviewed to ensure they reflect the needs of the current economic
environment.
The PDAC recommends that the following measures be adopted to
sustain the mineral industry in Canada and create jobs:
1. Make the current Mineral Exploration Tax Credit (METC) - which
has been renewed, often on an annual basis
since 2000 - permanent, thereby providing greater certainty to the exploration
industry and investors.
2. Increase the knowledge of our natural resources as a key driver
to exploration success through continued
investment in the Geomapping for Energy and Minerals (GEM) initiative, and
the Targeted Geoscience Initiative (TGI).
3. Encourage good corporate social responsibility and environmental
practices by undertaking a review, in
consultation with industry, of the tax rules governing the extent to which community
consultation and environmental compliance costs are eligible for the Canadian Exploration
Expense (CEE) deduction.
The role of Mineral Exploration and Mining in Canada’s economy
Canada dominates the global mineral exploration industry, with
financing provided through the TSX and its venture exchange for projects in
over 100 countries. Exploration is the lifeblood of the mining industry at home
and abroad and Canada needs to continue to attract a significant share of
global exploration investment to projects within its borders.
The Canadian mining industry accounts for approximately 20% of
Canadian goods exports and, according to the Mining Association of Canada, paid
$8.4 billion to Canada’s federal, provincial and territorial governments in
2010, a significant increase from $5.1 billion the preceding year. The exploration
and mining industry generates thousands of high-skilled, high-paying jobs
across Canada. In remote regions this is particularly important. As an example
of the impact that a new mine can have on a region, the Meadowbank gold mine,
which opened in Nunavut in 2010, has provided approximately 500 new jobs and
contributed almost 12 % of the GDP of Nunavut.
However, the future of mining in Canada is threatened by an
inability to replace the mineral reserves at the same pace that they are being
extracted; reserves of base metals are close to their lowest levels in 30 years
and gold reserves are far below their highs.
Mineral Exploration Financing
· As the ‘research and development’ branch of the mining sector,
exploration companies do not have production revenue and therefore must rely on
investors who are prepared to support higher risk activities.
· Due to the fragile state of the global economy there is downward
pressure on companies’ share prices and their ability to raise high-risk
financing.
· While Canada remains a leading destination for exploration
financing, exploration expenditures declined significantly from $3.3 billion in
2008 to $1.9 billion in 2009. Exploration financing recovered in 2010 to $2.6
billion but this recovery is threatened by the current global downturn.
· Flow-Through shares, a unique Canadian innovation, have been an
important factor in Canada’s success in exploration financing. This mechanism
allows a company to “flow” its tax deduction for exploration to an investor in
return for high-risk financing. The investor then has a share in the company
and a federal tax deduction, which may be matched by a provincial tax
incentive.
· The attractiveness of Flow-Through shares has been enhanced since
2000 by additional tax incentives, including the Mineral Exploration Tax Credit
(METC) and various provincial incentives. In the June 2011 federal budget, the
METC was extended for an additional year to March 31, 2012.
· In addition to market uncertainty, Canadian mineral exploration
companies face increased operating costs. These include compliance costs related
to the Crown’s Duty to Consult with Aboriginal communities and increased
environmental regulatory costs (i.e. federal, provincial and territorial
policies that establish new permitting conditions for companies beyond the existing
regulations and community engagement practices). The PDAC believes that most of
these costs qualify for renunciation as Canadian Exploration Expense (CEE)
under flow- through share arrangements.
· The situation is urgent, as without sufficient investor support,
companies will carry-out less exploration causing an impact on service
companies and individuals, particularly those in rural, northern and Aboriginal
communities. In addition, the sustainable replacement of Canada’s mineral
reserves will be at risk.
Expected Costs and Benefits of the proposed measures
1. Tax Measure: Mineral Exploration Tax Credit
Make the current 15% Mineral Exploration Tax Credit (METC) a
permanent feature of the federal income tax system.
Background
The mineral exploration tax credit was introduced in 2000 at a time
when it was very difficult to raise financing for mineral exploration even
using the flow-through share system. The credit provided a 15% tax credit on
top of the 100% tax deduction for CEE. Several provinces added their own
harmonized incentives. This system called “Super-Flow-Through” by the industry
provided the incentive needed to attract investors. This system has been in
place for over a decade and has helped ensure that Canada continues to attract
the greatest share of global exploration (Canada is currently first among
countries with 19% of the world’s exploration investment).
Cost
In the June 2011 federal budget, it was estimated that the
extension of this measure for an additional year
would result in a net reduction of federal revenues of $90 million over the
2011-12 to 2012-13 period.
Benefits
· In an average year, the METC investors collectively provide
companies with $400 million in new financing to be spent on grassroots
exploration in Canada.
· The money has to be spent in Canada, thereby ensuring that, if a
mine is discovered, the jobs and associated economic opportunities benefit
Canadians directly.
· If even a single mine is discovered, the taxes paid to all levels
of government are significant. The Mining Association of Canada reports that
$8.4 billion was paid to governments by the mining industry in 2010.
2. Geoscience mapping
Continue to invest in the Geo-mapping for Energy and Minerals (GEM)
and the Targeted Geoscience Intiative (TGI).
Background
These programs have provided important new breakthroughs in
geological knowledge that have resulted in significant exploration success. The
government has planned on continuing these programs. The PDAC supports this
decision and recommends that this research remains a firm commitment in future
budgets.
Costs
Both GEM and TGI are multi-year programs that have been funded for
several years. The annual costs to the federal government are $22 million for
GEM and $5 million for TGI.
Benefits
· To ensure that the costs to the federal government are kept to a
minimum, some projects undertaken are in partnership with the provincial
governments and, in the case of TGI, academia and the mineral industry as well,
who provide co-funding.
· The information gathered increases the knowledge of our natural
resources, encourages mineral exploration and contributes to the professional
development of geology students.
· The Geological Survey of Canada estimates that each dollar spent
on these programs results in over $100 being spent on exploration.
3. Support for Responsible Exploration and Development
Clarify the current CEE guidelines to allow companies to manage new
costs associated with government and societal requirements.
Background
In 2007, the Canada Revenue Agency (CRA) sent a letter to the PDAC,
providing guidance regarding expenditures related to community consultation,
environmental studies and feasibility studies and their eligibility for CEE
treatment. However, differences in the interpretation of these guidelines by
industry and the CRA have led to some confusion as to which expenses are
eligible.
Cost
No new cost associated with providing a clearer definition of the
eligibility criteria.
Benefits
Improved corporate social responsibility and environmental
practices by exploration companies. Communities located near where the
exploration is taking place, often northern and Aboriginal communities, will be
better informed and more involved in mineral exploration, resulting in
additional employment and business opportunities. Companies and Canada Revenue
Agency auditors will have greater certainty regarding the eligibility of costs
related to exploration.