Other Tax Incentive Measures
Before developing a mineral resource and operating a mine, a mining company must invest considerable amounts during the exploration and development phases. The exploration phase is the most risky part of the mineral development process. Exploration activities are essential to the development of the mining sector and hence to the country’s economic growth.
Exploration companies must obtain significant investments in order to finance their projects, since they do not have internally generated funds (operating revenues).
In addition to the measures provided for in the Mining Tax Act, Québec offers a number of tax measures in the Taxation Act to support these activities. They include deduction of exploration and development expenses, Québec’s flow-through share regime and the tax credit for resources.
Québec’s Taxation Act allows development companies operating mining enterprises to deduct certain expenses from their taxable income, including:
- 100 % of Canadian exploration expenses incurred (s. 395);
- 100 % of Canadian development expenses incurred (s. 408).
A flow-through share is a security that allows a mining company to acquire new funds in order to finance its exploration expenses. The flow-through share mechanism allows natural resource sector companies to renounce mineral exploration expenses to their investors, who may then deduct those expenses when calculating their own taxable income. The expenses may be applied against income from all sources.
Flow-through shares provide a basic deduction of 100% of their cost, on the condition that they are used to fund eligible expenses. An investor may be entitled to additional deductions in Québec, of up to 20% of the cost of its investment, for a total deduction of 120%.
Additional information on Québec’s flow-through share regime (in French only) can be found on Revenu Québec’s website .
The following table summarizes the main measures relating to flow-through shares offered by the Québec and federal governments:
|Exploration costs in Canada||100 %||100 %|
|Mineral exploration costs incurred in Québec||10 %|
|Surface mineral exploration costs incurred in Québec||10 %|
|Issuing costs||20 %/year (5 years)1|
|On mineral exploration expenses determined to be incurred in Canada||–||15 %2 non-refundable|
|When the shares are sold||The capital gain may be exempt up to the share purchase price3||Capital gain on the entire sale price4|
1 Maximum deductible amount per investor is 12 % of the product of the issue, provided the expense is allocated to it (e.g. brokers’ commission, legal and accounting fees, printing fees).
2 The credit has been extended up to March 31, 2024.
3 When all the conditions are met.
4 Since the adjusted cost base of the share is equal to zero.
An eligible corporation which, during a fiscal year, has an establishment in Québec, carries on a business in Québec and incurs eligible expenses may, on certain conditions, claim the tax credit for resources for that year.
Eligible expenses are those incurred to determine the existence, location, extent or quality of a mineral resource in Québec. They include expenses incurred during prospecting, carrying out geological, geophysical or geochemical surveys, drilling and trenching or digging test pits, preliminary sampling and certain expenses for environmental studies or community consultations.
These expenses are reduced by the amount of any government or non-government aid and must have been paid when the tax credit is requested.
Expenses renounced in respect of a share under Québec’s flow-through share regime are not eligible for the tax credit relating to resources.
Eligible corporations may claim the credit by attaching the prescribed form to their Québec corporate income tax return.
You will find additional information on the tax credit for resources (in French only) on Revenu Québec’s website .
Some examples for investors
For fiscal year 2019, the net after-tax cost per $1,000 of flow-through shares is $306.78 where the taxpayer reaches the highest marginal taxation rate.