The good news is that the mineral exploration tax credit of 15% has been extended for an additional year.
In addition, the budget has made an amendment to Section 66.1(6) of the federal tax legislation to add the words “and before budget day” to subsection (g).
Subsection (g)(ii) has been added and it has the effect of reducing the deductions for Canadian Exploration Expense (CEE) that were previously allowable.
In addition, a new subsection (g)(iii) provides some grandfathering for CEE that were made the subject of an agreement before budget day or related to the construction of a new mine which was started before budget day or if the engineering and design work for the construction of a new mine as evidenced in writing is commenced before budget day. These would still be deductible as CEE in certain circumstances by 100% provided the expense was incurred before December 31, 2014, 80% if incurred before December 31, 2015, 60% if incurred before December 31, 2016 and 30% if the expense is incurred before December 31, 2017.
The current allowable CEE for obtaining permits, regulatory approvals, environmental assessments, community consultations or impact benefit studies or similar activities remains a CEE.
The difficulty that arises is that any property on which there would be a resource, since a resource is required to be disclosed under National Instrument 43 101, may well not qualify for CEE for any expenses incurred after the date of the report.
A report is generally required where there is a resource in a property under National Instrument 43 101. This may lead to situations where public companies, or private companies for that matter, elect not to disclose resources so as not to trigger the loss of CEE where such CEE was carried out on properties located in Canada.
The difficulty arises because any engineering design work for the construction of a new mine, as evidenced in writing, would no longer be considered as CEE. For example, a preliminary economic assessment clearly addresses engineering for a potential mine and any expenses would not be treated as CEE after the preparation of such a report whether the report was filed or not as required under Canadian Securities Administrators Rules.
Hopefully the good news on the extension of the mineral exploration tax credit may be affected by the bad news in the change in the determination as to what constitutes CEE.
The Canada Revenue Agency has taken the position for several years now that any expenses traditionally treated as CEE are no longer being treated as such and the budget message is clearly intended to clarify that situation, although it may create problems for companies since the line may not have been clarified very much but rather moved in order to treat expenses which were formerly CEE as now Canadian development expenses.