Federal budget backs Indigenous mine projects with $5B while hiking capital gains tax for investors

Canada’s new federal budget contained several measures impacting the mining industry including loan guarantees for Indigenous projects, increases in the capital gains tax and credits from mines to manufacturing for electric vehicles.

An Indigenous loan guarantee program, reported earlier by The Northern Miner, offers up to $5 billion to back natural resource and energy projects in Indigenous territories at lower interest rates than they might normally be able to obtain. It’s aimed at helping communities secure capital and overcome barriers to equity investment. There’s also a separate $16.5 million over two years to help applicants apply.

Investors may be most concerned about the tax rate increase to two-thirds from half of profits from capital gains in the sale of property and securities. For individuals, it only affects profit of more than $250,000 while businesses face an immediate hike. The move is expected to raise $19 billion over five years, according to government documents.

The Prospectors and Developers Association of Canada (PDAC) and the Ottawa-based Mining Association of Canada (MAC) supported the Indigenous loan program, and a target to approve mining projects within five years, while they expressed concern about the changes to capital gains tax.

“We believe this budget will be very damaging to financing of mineral exploration in Canada at a time when new investment in critical minerals exploration is most needed,” MAC said in a release. “The changes to capital gains may undermine the mineral exploration tax credit and harm mineral exploration financing.”

Tax credit details

This year’s budget clarified last year’s introduction of the clean technology manufacturing investment tax credit, which provides a 30% refundable tax credit on the cost of investments in eligible property.

The tax credit covers the mining of copper, nickel, cobalt, lithium, graphite and rare earth elements and is expanded to include polymetallic operations that produce more than one material. It’s also making accommodations for tailings ponds and mills that contribute at least half to a site’s production.

“PDAC will be unwavering in voicing how uniquely Canadian investment incentives like flow-through shares and exploration tax credits must remain well-oiled and ingrained in our financial landscape,” the group said in a release.

The budget doesn’t promote mining in the country’s far north, the Northwest Territories and Nunavut Chamber of Mines said. Over the past five years it’s been demanding a north of 60 degrees latitude tax credit for mineral exploration to help the region compete with provinces that create their own tax incentives on top of federal help. Territories must rely on federal government initiatives.

“It’s not a cash outlay, just foregone revenue to Canada, which we believe is made up in spades with exploration spending and success,” chamber senior adviser Tom Hoefer told The Northern Miner by email on Wednesday. “We don’t have enough mines to replace upcoming closures because exploration investment has been insufficient to increase the odds of finding new mines.”

Election budget

The 2024-25 budget forecasts $59.2 billion in new spending over five years – about a 1% increase – while keeping a deficit of around $40 billion for the next three years. It would decline to $20 billion in 2028-29. Pundits called it an election budget – the Liberal government faces a vote in the next 18 months – that is heavy on housing spending to attract younger groups such as Millennials and Gen Zeds while being less concerned about the fiscally conservative.

“There are no measures in here to really stimulate investment in general and to stimulate competition, which will force businesses to use that investment more wisely,” columnist Andrew Coyne said on CBC TV. “There’s just the usual subsidies and tax credits and gimmicks for the particular favourite sectors of the government, artificial intelligence or clean technologies.”

A new 10% electric vehicle supply chain tax credit applies to the cost of any building where EVs or the batteries and other components that power them are constructed. The tax credit is expected to cost $80 million over five years, and an additional $1 billion from 2029-30 to 2034-35.

The budget’s 15% clean electricity investment tax credit applies to new equipment or refurbishments related to low-emitting electricity generation systems. It’s expected to cost $7.2 billion over five years starting in 2024-25, and an additional $25 billion from 2029-30 to 2034-35.

The energy systems can be wind, solar, water, geothermal, waste biomass, nuclear, or natural gas with carbon capture and storage. It also applies to batteries and pumped hydroelectric storage, and transmission of electricity between provinces and territories.

The government announced a $2.5 billion carbon rebate for 600,000 small and medium-sized businesses. It’s from a cash pool that’s been collected since 2019.

Capital gains

On the capital gains tax, the government is increasing the lifetime personal exemption to $1.25 million from about $1 million. Also, entrepreneurs would be able to qualify for a one-third tax (known as the inclusion rate) on capital gains depending on criteria, instead of the new two-thirds rate. Claimants must directly own the shares, the company must be Canadian-controlled and at least half of the company’s assets must do business in Canada.

As previously stated, the budget extends the 15% mineral exploration tax credit that applies to junior mining companies using flow-through shares. They allow investors to deduct the exploration expenses from their taxable income. It was approved for another year.

The budget allows individuals to claim 80% (instead of a proposed half) of the charitable donation tax credit. The British Columbia-focused Association for Mineral Exploration (AME) called it a “strategic move that offsets some of the capital gains associated with the mining and exploration tax credit and the critical minerals exploration tax credit.

“However, we urge the government to ensure that the increased capital gains inclusion rate for corporations and trusts does not adversely affect the competitiveness of Canadian companies, and disincentivize mineral exploration financing,” the AME said in a release.

Artificial intelligence, which is increasingly being used in mining from pinpointing exploration drilling to optimizing mills, gets $2.4 billion over five years in the budget. Some $2 billion starts a new fund to help Canadian researchers and start-ups, and scale-up businesses.

Housing

On housing, the budget holds a $23 billion program to help build nearly 4 million homes by 2031. The sum contains $8 billion in new spending and $15 billion for construction loans.

The government is performing better than its G7 peers by maintaining the 2023-24 deficit below $40.1 billion and aiming to lower the debt-to-GDP ratio in 2024-25 to 1.3% compared with 5% in the United States, Finance Minister Chrystia Freeland said in Parliament.