PDAC challenging federal grant incentive plan

The Prospectors and Developers Association of Canada (PDAC) has expressed concern about the federal government’s new grant incentive program for mineral exploration on a number of issues.

The program, to be known as the Canadian Exploration Incentive Program (CEIP), will allow companies to claim up to 30% of their exploration expenses (to a maximum $10 million) in the form of a grant, starting Jan 1, 1989.

The start of CEIP will be tied in with an overhauling of the flow- through financing scheme which currently allows for a tax writeoff of $1.33 for every $1 invested on mining exploration. Starting Jan 1, individual tax writeoffs will be reduced to a dollar-for-dollar basis, while for corporations, the writeoff will fall to $1.16 on Jan 1, 1989, and $1 (dollar-for-dollar) on Jan 1, 1990.

The PDAC’s three major concerns deal with an exploration cost listed as a Canadian exploration and development overhead expense, the rules as they apply to associated companies, and arm’s length regulations. Overhead expense

Proposed by the mineral policy sector of Energy Mines and Resources Canada is making the overhead expense ineligible, such an expense referring in general to a cost incurred off the property. The PDAC points out that a number of necessary activities related to exploration take place off the property. Early reconnaissance work, it says, could involve non-site specific expenses equal to 16-20% of total exploration costs.

The PDAC suggests the definition for overhead expense contained in the current income tax regulations would serve the CEIP program and should be adopted by the ministry.

The dates May 2 and May 3, 1988, are central to the second major concern, which deals with associated companies. The PDAC says that in general terms, where a company becomes actively involved in exploration after May 2, that company would be considered to be associated with another company where 10% or more of the company’s shares are owned by the other company, or 10% or more of each corporation’s shares are owned by the same person. Where a company was actively involved in exploration prior to May 3, the applicable percentage is 50%. Spending limit

Of concern to the government is the possibility of the $10 million limit being breached more than once by a group of companies, in the case, for example, of a junior seeking to increase its interest in a project being developed in partnership with a senior. (The senior may have already reached the eligible spending limit).

The PDAC says establishing two sets of rules depending on the date is discriminatory, and it recommends the government reconsider this proposal.

“We believe the level of the 10% test is so low that traditional ways of financing in the mineral exploration sector could be adversely affected. We believe the 50% test, combined with an anti-avoidance rule, could deal just as effectively with the government’s concern,” says the organization.

The third issue deals with a proposal to deny CEIP payments where flow-through shares are issued to a non-arm’s length investor. The PDAC points out that it is common practice for the controlling shareholder of a junior to seek to purchase a portion of his company’s flow-through issue because he does not want his ownership percentage to be diluted. Also, from a marketing point of view, new investors would prefer to put their money in a company in which the promoter/operator is risking his own money.

The PDAC recommends the arm’s length rule not apply where the non-arm’s length investor acquires an amount of flow-through shares which does not increase his percentage interest in the company.