Australian resources investors (and companies) have long looked at their Canadian cousins with envy for the generous tax concessions given by various Governments to encourage exploration and development within Canada.
Under the ‘flow through shares’ regime, first introduced in 1954, companies can ‘renounce’ certain exploration expenditures (in Canada) to investors that contribute to placements, providing them with lucrative tax deductions and credits. Coupled with capital gains tax concessions and regional tax incentives, it often meant that the tax benefits exceeded the price of the shares.
This has driven and maintained a high flow of funds into the sector, with over C$1 billion raised in 2023, according to the Prospectors and Developers Association of Canada (PDAC).
However, recent changes in the Canadian Federal Budget have the potential to materially change the dynamics and attractiveness of the FTS regime, with PDAC estimating that as much as C$300 million could be diverted each year due to the changes.
The Canadian Government made the following changes in the recent Budget:
- The Canadian Government is planning to increase the share of capital gains tax paid to 66% for individuals with annual investment profits in excess of C$250k.
- The Mineral Exploration Tax Credit of 15% was extended by 12 months to the end of March 2025. This is a credit on top of the existing 100% deduction allowed for the flow through shares themselves. Many were hoping for a three year extension to this credit.
- The Critical Minerals Exploration Tax Credit is unchanged at 30% and has a few more years legislated in it.
The Government estimates that the changes will only impact 0.13% of Canadian private citizens and around 12% of businesses.
So what’s the big issue that’s got Canadians worried?
Due to the minimum investment requirement of C$250k for FTS investments, its not really an issue for regular ‘mum and dad’ investors (as they generally don’t get a look in). It’s the ‘0.13%’ that matters for Canadian explorers and FTS issuers. It is this group of high net worth investors that prop up most of the FTS placements.
This also has a trickle down impact into other sectors.
Due to some creative structuring by groups such as PearTree Securities and others in Canada, Charity FTS placements have emerged as a tax effective form of philanthropy. Essentially, rich investors buy the stock, claim the deductions and gift the shares to a charity (that normally has an on sell facility). The charity gets the money, and the investor gets a bigger deduction than donating directly. Changes to the CGT, FTS and Alternative Minimum Tax (AMT) structures are likely to impact these groups.
Similarly, we have seen an increasing number of ASX-listed companies utilise FTS structures to fund their Canadian exploration programs. Shares are issued at a premium in Canada to investors keen for the deductions and then on sold at a discount to Australian investors. For the issuing companies, it provides the demand of Canadian deduction hunters with the benefit of having the shares in local hands. Once again, the changes are likely to result in both smaller premiums being able to be achieved as well as a smaller pool of willing investors.
Patriot Battery Minerals (ASX:PMT) put away C$75 million in a new FTS issue this week, capitalising on the small window between the Budget announcement and the imposition of the new changes. With a bank balance of over C$100 million prior to the raise, it was certainly opportunistic.
Only time will tell how dramatic the changes will be, or if some clever bean counters can devise a workaround to keep the funds flowing.
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Photo by Hermes Rivera
