Prime Minister Stephen Harper announced this week that a re-elected Conservative government would extend the mineral exploration tax credit for another three years and would increase the value of the credit for northern and remote communities.
Currently, investors are offered a 15 per cent tax credit to finance mineral exploration. That credit would be increased to 25 per cent for operations in the territories, as they face higher costs due to their remote locations.
“With this enhanced credit, companies and communities will be able to move forward with more potentially game-changing mining projects in remote parts of the country,” Harper said in a news release.
The extended tax credit and the enhanced credit would cost $60 million per year beginning in 2016-17.
The enhanced tax credit is in line with a recommendation from a report released this spring, produced by the Mining Association of Canada and the Yukon Chamber of Mines, among others. The report calculated that exploration and mine construction cost up to 2.5 times more in the North than in southern Canada.
“It’s nice to see that one of the political parties has responded to that report,” said Samson Hartland, executive director of the Yukon Chamber of Mines.
The Harper government estimates that the mineral exploration tax credit has helped mining companies raise over $5.5 billion since 2006.
But Lindsay Tedds, an economics professor at the University of Victoria, said that figure is misleading.
That’s because the tax credit is available to investors who purchase flow-through shares – shares that allow them to deduct expenses incurred by mining exploration companies from their own income. Flow-through shares have produced significant investment in exploration, but Tedds said there’s no evidence that the additional tax credit has achieved anything beyond that. “What (the government is) assuming is that it’s the METC that’s driving this investment, and it’s not,” she said. “We just haven’t seen any marginal effect from this METC.”
Tedds added that about 90 per cent of investment in mineral exploration still comes through “plain vanilla shares,” because flow-through shares are more expensive. In fact, 80 per cent of those who buy flow-through shares are high-income investors in the highest marginal tax bracket who are “trying to minimize their tax bill,” she explained. They aren’t necessarily investors who care about mining.
So why has the Conservative government continued to renew the tax credit if it isn’t effective?
“It’s good politics,” said Tedds. “But to suggest that it is a tax credit… that influences people to invest in a particular area is naive.”
Tedds argued that it doesn’t make sense to create incentives for resource extraction when mineral prices are low. She said it would be better to wait until commodity prices rise and drive investment on their own.
“You want to be taking the stuff out when the prices are at their highest,” she said. “Sometimes we have to be that kid in the room with two marshmallows on the plate and we just have to wait.”
But in the Yukon, where there is currently just one operational hard rock mine, that could be a difficult pill to swallow.
Hartland pointed to a Fraser Institute study released earlier this year that ranked the Yukon’s geological prospects first in the world for exploration investment. He said he had a hard time believing any tax credit that may bring exploration dollars to the territory could be cast in a negative light.
“(Mining) is a global industry. It is highly competitive,” he said. “Others are positioning themselves to be competitive, and Canada should be no different.”
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