Ottawa offers to soothe depletion blues

The federal government isn’t budging on its commitment to phasing out the earned depletion portion of flow-through shares, Energy, Mines and Resources Minister Marcel Masse has announced. But he says the government will help mining companies if they suffer under tax reform.

“I recognize that the proposed tax reform could have special consequences on the financing of junior firms,” Masse told the Canadian Save Flow – Through Committee at a recent symposium in Ottawa. “The government * * * is prepared to consider necessary corrective measures if the tax reform changes put forward affect the viability of mining exploration.”

He assured an audience of worried lobbyists that Finance Minister Michael Wilson is “prepared to look into providing temporary assistance that might prove to be necessary during periods of economic decline to make sure that exploration continues in Canada.”

Reportedly, Masse later told the press that any corrective measures would likely come in the form of program spending, as opposed to fiscal policy changes. (He hasn’t said how depressed the mining industry would have to become before such action is taken.)

However, in his speech, Masse said the government has felt it “essential to resist the easy temptation to implement programs that could marginalize an industry and thus destroy its prospects for medium and long-term growth.”

He added: “I cannot subscribe to measures that would shield the mine exploration sector from market imperatives or from tax provisions that would reward the industry at the expense of results. This, I believe, would be a disservice to both the industries and the regions in which they operate because, as the National Energy Program (nep) demonstrated so well, a country, a region or industry cannot isolate itself from changing patterns in international economic conditions.”

(The nep, introduced by the Liberal government in 1980, was designed to increase Canadian ownership of the oil industry, achieve oil self-sufficiency and gain a greater share of energy revenues. The Conservative government dismantled it in 1985.)

Masse said tax reform works on a principle different from that of the nep: “We believe that decisions concerning exploration and development have to be based on commercial and geological considerations, rather than political imperatives or tax benefits. That being the case, our government put an end to a wide range of measures that treated exploration as an objective in itself or that assessed taxes on revenues rather than on profits.” Disastrous impact

The symposium was part of an ongoing lobbying effort to persuade Ottawa to back down from its plan to phase out “mining exploration depletion allowance,” commonly known as earned depletion. There has been considerable speculation that the phase-out, in conjuction with other tax reform proposals, would have a disastrous impact on mineral exploration.

The flow-through shares plan was introduced in 1954. But it was altered in 1983 when the Liberal government amended the Income Tax Act to allow the transfer of the earned depletion deduction to individuals. The result was a tax writeoff in excess of the amounts actually spent by individual investors for exploration and development.

Since 1983, exploration companies have succeeded in raising unprecedented amounts of investment dollars. In 1987 alone, it is estimated that more than $900 million in flow-through money was raised. Masse said that from 1983 to 1987, the capital generated by flow-through shares jumped an astonishing 2,800%.

Under the current flow-through share system, each dollar invested by an individual in Canadian mining exploration provides a tax writeoff of $1.33. Tax reform calls for the end of that extra 33 cents earned depletion writeoff. Depletion slashed

The rate at which depletion can be earned is to be slashed to 16 2/3% from 33 2/3% by July 1, 1988. It would be phased out completely as of Dec 31, 1989. In other words, the total tax writeoff would be cut from the current $1.33 to $1.17 by July 1, 1988, and to a dollar-for-dollar deduction by Jan 1, 1990.

(The Quebec government has plans to keep the 33 2/3% depletion rate in effect until the end of 1989. It can do this because the province collects its own income tax.)

Masse argued that the intention of tax reform is to make tax revenues more secure and predictable.

“We believe that it is possible to broaden the tax base by sensibly reducing the tax rate on individuals and companies. This would not be possible without abolishing a large number of tax breaks applying to all sectors of the Canadian economy. To look at this reform from the perspective of the interests of one industry only, would be, in my opinion, misleading in the discussion we are having.

“A general reduction in the tax rate favors both companies and individuals and, at the same time, reinforces our undertaking. As well, the comparative advantage of flow- through shares could only be increased if all the other sectors of the economy developed in a context of fiscal equality.”

Eveline Kasner, co-president of the Save Flow-Through Committee, said Masse’s speech resulted in an increased level of concern among those attending the symposium. She argued that companies are finding it difficult to raise capital beyond July 1, when the initial cutback takes effect. Marcel Masse