Wilson explanation ovrlooks key information

Throughout the summer months the Prospectors and Developers Association of Canada conducted a national campaign designed to inform provincial and federal MPs of the dangerous situation into which Canada’s mineral industry is now heading. PDAC armed its more than 4,000 members with a brochure that demonstrates to MPs how the current lack of adequate incentives to encourage public investment in mineral exploration is contributing to a major decline in exploration activity. This in turn will lead to a lowering of reserves and a serious erosion of Canada’s ability to maintain its position in the global metal market place. Many PDAC members have now received a 4-page form letter response from Finance Minister Michael Wilson which, at first glance, may appear to be comprehensive and logical. However, we believe that the letter defends the position of the federal government on the basis of some misleading and inaccurate statements, as indicated below. “It should first be understood that mining in Canada has one of the lowest average tax rates of all industries.”

This statement ignores the fact that each of the producing provinces levies a profit-based mining tax. When this provincial mining tax is taken into account, it is clear that the mining industry has the highest tax rate of all industries. For example, the statutory tax rate on mining profits in Ontario is 52.5%, as compared with 40.8% for manufacturing and 44.3% for other industries. “. . . the government recognizes the special nature of the prospecting sector of the mineral industry through the unique treatment prospectors receive under the Income Tax Act when they dispose of their mining properties in exchange for shares.”

This treatment accorded by section 35 of the Income Tax Act is less beneficial than the treatment accorded by section 85 of the Act to all other taxpayers. Any other taxpayer can exchange virtually any kind of property for shares of a company and obtain the same rollover treatment as the prospector. However, when the prospector sells his shares, he is not entitled to the capital gains exemption which is available to any other taxpayer on his shares received under section 85. “The deeming of the adjusted cost base (ACB) of flow-through shares at zero has been in place for 30 years, and its objective is to prevent taxpayers from using the same deduction twice.”

In fact, the taxpayer would not be able to use the same deduction twice. Other provisions of the Act prevent this. Furthermore, part of the PDAC’s position includes a proposal for further amendments to the Act to ensure that the same deduction would not be claimed twice. “The cumulative net investment loss (CNIL) rules do not reduce the total amount of the lifetime capital gains exemption available to the investor.”

This statement is true, but it does not address the PDAC’s position that the CNIL rules discriminate against flow-through share investors because they serve to defer, perhaps indefinitely, the investor’s access to the capital gains exemption. “The PDAC proposals would result in a significant cost to the federal budget and to Canadian taxpayers.”

It has been estimated that the annual cost of the PDAC proposals would be in the $10-million range. This would appear to be a small cost to preserve Canada’s pre- eminent position in the global mining community. Further, this cost pales in comparison to the cost of other government programs such as the Cape Breton Investment Tax Credit, Syncrude Remission, and Hibernia assistance.

The PDAC has made feasible proposals to deal with the critical need for the junior mining industry to survive and for Canada to find additional ore deposits to replace rapidly diminishing reserves. The federal government may not agree with the PDAC proposals, but it has not suggested any proposals of its own. The country requires the federal government to take leadership in this matter. Robert Ginn is the president of the Prospectors and Developers Association of Canada.