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AMT Changes: Impact on the Canadian Mineral Exploration Industry

Recently, I had the privilege of having a thought-provoking conversation with Kendra Johnston, our Managing Director at PearTree Canada. Kendra and I discussed the challenges, and opportunities that lie ahead and the impact of the new AMT laws on flow-through, looking into what the future may hold for the exploration & development sector.

In the wake of recent changes to Canada’s Income Tax Act (ITA) rules known as Alternative Minimum Tax (AMT) effective January 1, 2024, a cloud of uncertainty has descended upon the Canadian exploration industry. What was once seen as an initiative to ensure fairness in the tax system, the AMT changes have raised concerns about potentially devastating consequences on resource exploration financings and collaterally on charitable initiatives.

According to PDAC, over 80% of exploration is financed under the flow-through share (FTS) regime. Approximately 80% of those are charity flow-through financings.

The federal government has stated that a very small group of taxpayers are affected by the recent AMT rule changes. Unfortunately, it is the same very small group of high-income taxpayers all currently constrained by AMT which fund most resource exploration in Canada. As Kendra states, “In the 12 months following the April 2022 introduction of the Critical Mineral Exploration Tax Credit (CMETC) fewer than 1100 PearTree clients funded $225 million of flow-through share financings, representing 64% of all critical mineral FTS financings, and fewer than 2,000 taxpayers, are responsible for funding about three-quarters of all Canadian mineral exploration.” Due to the AMT rule change, these same clients will now need more than 150% additional income to subscribe to the same level of flow-through shares (FTS) required to fund all FTS financings. The CMETC tax incentives work. The new AMT legislation is certain to disincentivize investment. Government is giving with one hand and taking away with the other.

Beginning in 2024 the AMT calculation increases the capital gains inclusion rate to over 62% in most provinces.

“The likely 2024 impact on exploration jobs is an alarming decline in dollars available for flow-through financing by about one-third,” says Kendra. This translates to a staggering loss of about $250 million annually in exploration dollars going directly into the ground, resulting in less exploration and fewer jobs, primarily in rural and remote communities and significantly reducing the likelihood of finding resources of size and quality to warrant future mine construction.

Compounding the issue, the AMT calculation disheartens and penalizes generous Canadians, subjecting them to taxation on their donations. Being asked to pay tax for the privilege of giving away one’s wealth is unreasonable. This tax-the-rich at any cost doctrinaire policy hampers the vital operations of charitable institutions; the impact of which is unknown while dismissed and minimized by government. The charity sector believes that the minimum reduction to charities is $500 million annually, many believe the impact will be much greater.

The exploration sector, already susceptible to high-risk investors pursuing swift returns, continues to look for certainty and effectiveness from government programs. The resource sector investment paradigm shift, from traditional resources like gold to critical minerals like lithium, underscores the necessity for consistent and sustainable tax incentives during challenging market conditions.

As it stands, the mineral exploration sector, which heavily relies on flow-through shares, faces new monumental hurdles imposed by government in accessing capital for crucial exploration projects. Balancing tax fairness with economic growth is essential, and policymakers must consider the broader implications of their decisions.

We encourage you to reach out to Alanna Clark, our full-time VP of Government Relations at PearTree. Alanna can aid when it comes to engaging with the government. Alanna can be reached at alanna.clark@peartreecanada.com

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This report / article has been prepared for general information purposes only. Any opinions herein reflect the views of the Analyst and/or Author as at the date appearing above, and does not constitute a recommendation or individual investment advice, nor should it be considered a solicitation for the purchase or an offer of securities. Information contained in this report is derived from sources believed to be reliable, but its accuracy cannot be guaranteed.

The information provided herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country including the United States, where such distribution or use would be contrary to law or regulation or which would subject PearTree to any registration requirement within such jurisdiction or country.