Flow-through gets extension

The recent federal budget extended, by one year, the Investment Tax Credit for Exploration in Canada (ITCE), also known as “super” flow-through shares. The buying period for shares eligible for the ITCE will end Dec. 31, 2005, 12 months longer than first planned.

Super, or enhanced, flow-through shares finance exploration by allowing companies to transfer unused income tax deductions to investors. The credit is equal to 15% of specified grassroots mineral exploration expenses incurred in Canada by a corporation and handed over to an individual under a flow-through share agreement.

Companies have until the end of 2006 to spend the money raised during 2005 under a clause known as the “look-back” rule. Under the previous system, companies had until the end of February to spend money raised in the previous year.

The government plans to phase out the “super” part of the flow-through program; the extension is designed to allow companies adequate time to adjust.

The Prospectors & Developers Association of Canada (PDAC), which lobbied the federal government on behalf of mining to extend the super flow-through buying period, estimates that the ITCE program has helped raise more than $750 million for mineral exploration in this country.

David Comba, the PDAC’s director of issues management, believes the amounts raised by super flow-through shares are helping Canada return to levels of domestic mineral exploration that support sustainable mining. “Flow-through is what keeps Canada competitive,” he says.

Currently, less than $1 of every $3 raised by junior companies in Canada for mineral exploration (estimated at $3 billion in 2003) stays in this country.

Adds PDAC President William Mercer: “The money put up by [flow-through] investors is spent mainly in rural and northern Canada, making it one of the most innovative and cost-effective systems of transfer payments ever devised in that governments are not involved in deciding where the money is to be allocated.”

The PDAC estimates that the super flow-through share program has resulted in roughly two discoveries per month since ITCE was introduced in 2000. Noteworthy discoveries include diamond properties along the Melville Peninsula in Nunavut and deep in the Otish Mountains of Quebec, high-grade nickel-copper discoveries in the Sudbury basin and near Raglan in northern Quebec, copper-zinc properties in Nunavut and west of James Bay in Ontario, and gold discoveries in Saskatchewan and Manitoba.

ITCE started in October 2000 when the federal government introduced a temporary tax credit for mineral exploration designed to moderate the impact of the global downturn in exploration on communities.

The credit provides individuals with an additional tax incentive related to the purchase of certain flow-through share investments.

The budget also includes a clause extending the non-capital losses for companies to 10 from seven years. This means that if a mining company took eight years to progress to production and incurred operating losses during that period, it can now deduct the accumulated losses against current income.