Small details derail big thinking in Canada’s green budget

During Finance Minister Chrystia Freeland’s federal budget address to Parliament on Mar. 28, Canadians heard an unprecedented call to action for the new green economy. 

“We’re going to build big things here in Canada – from a Volkswagen battery plant in Ontario, to the Galaxy lithium mine in Quebec, to the Trans Mountain expansion in Alberta, to the Atlantic Loop, to the LNG terminal in Kitimat, B.C.,” she declared.  

Of course, with this big thinking comes big money.  

Billions of dollars have been pledged to support critical mineral infrastructure and development. Meanwhile, the Canada Infrastructure Bank will pledge billions more to help kick start clean energy projects.  

The government also upheld The Critical Mineral Exploration Tax Credit (CMETC) first announced in the April 2022 budget.   

Exploration involving critical minerals, such as copper, nickel, lithium and cobalt, will now kick out a 30% tax credit (equivalent to a 60% tax deduction).  

When the CMETC was first announced, for those of us in the charity flow-through share business were cheering from the sidelines. Because quietly, for the last 17 years, our structure has been supporting this cause. In fact, our industry has been responsible for billions in financing for Canadian junior mining.  

Simply put, the flow-through share financing model, with an immediate liquidity provider, has been a stalwart for critical mineral exploration in Canada – and junior mining in general — with a significant amount of all financing coming through this trusted charity flow-through structure.  

Think of us as the grassroots of Canadian mining – by giving junior mining the financial means to explore, and discover, it provides the water and fertilizer for industry to sprout, and grow.  

Finally, our industry was receiving some respect.  Or so it seemed.  

In March, I wrote a column about how the devil would be in the details for Canada’s critical mineral industry. Sadly, my words have become strangely prophetic.  

Indeed, one small detail in the budget would throw a big wrench into the government’s lofty plans.  

Alternate minimum tax (AMT) was first implemented in 1986 to limit tax deductions for high-income earners. And since then, AMT rates have remained steady at 15% — until now. As of 2024, the government plans to increase this figure to 20.5%, and in the process, strike a significant blow to the mining industry, the very industry it seeks to grow.  

If the new AMT is implemented in 2024, then the maximum flow-through share purchase will decrease from our largest income buyers.  

Flow-through shares, which were first introduced in 1954, offer high-taxed Canadians a 100% tax deduction for investing in junior mining stock.  

Flow-through shares are not held for long. The buyer can sell these shares almost instantly, at a discount, to a third party, or liquidity provider, and eliminate any stock market risk. 

They can also be donated to a registered charity, which sells the shares, at the same discounted price, to investors with a long-term investment horizon. The buyer takes on the stock risk for the standard four-month private placement hold period. 

Together, these tax policies allow our clients to give significantly more to charity due to the tax efficiency. It has been an enormous success story for Canada – a true example of innovation when it comes to tax policy.  

In some ways, Canada’s critical mineral strategy is our true coming of age moment, almost 80 years in the making, from when flow-through shares were first introduced. 

Then along came AMT, the first increase in almost 40 years. And the timing couldn’t be worse.  

Instead of nurturing the roots of Canadian critical mineral financing, the government just stepped on the hose, reducing the water supply.  

In basic terms, an increase in AMT will materially impact how much flow-through many of our clients can purchase. A good analogy would be if the government reduced the maximum RRSP limit, now at $30,000 per person, to $23,000, a 25% reduction.  

Under this new rate of AMT, the tax benefit has been diluted. 

Meanwhile, due to improved stock market optimism for critical minerals, we have seen a considerable increase in available flow-through product – and that’s great news for Canada’s critical mineral strategy, right?  

Well, only if we have the high-taxed Canadians to buy large amounts.  

As an industry, we will have to work that much harder to find more Canadians to participate in each flow-through share financing, to bridge the gap. In times like these, when it’s a full court press to build our critical mineral pipeline, and future green economy, we should be making it easier for these companies to receive financing, not harder. The stakes are high. 

“We learned the hard way, during the pandemic, when you rely on just in time supply chains, that circle the globe, there are significant vulnerabilities, disruptions and delays, and it drives up costs here at home, both Canada and the United States,” U.S. President Joe Biden said on Mar. 23 in his address to Parliament one week before the federal budget. 

“There is a better way. Our nations are blessed with incredible natural resources. Canada in particular has large quantities of critical minerals that are essential to our clean energy future – the world’s clean energy future. And I believe we have an incredible opportunity to work together to source and supply in North America everything we need for reliable and resilient supply chains.” 

These remarks during Biden’s visit to Canada were met by a standing ovation and thunderous applause.  

The President is absolutely correct. But to reach this shared future, we must all work together.  

The government increased AMT to help boost tax revenue, ensuring every high-income Canadian pays his or her fair share. But did the government understand its impact on this grand vision for the future? I suspect not.  

If AMT must be increased, an exception for flow-through shares should be explored. There is a middle ground here, where the government’s desire for more tax revenue can be balanced with a robust critical mineral strategy that everyone wants.  

The 2023 budget truly underlines why agencies, the government and the private sector need to communicate more effectively, so the big ideas don’t get squashed by the little ones.  

— Peter Nicholson is the president and founder of Wealth, Creation, Preservation and donation (WCPD) Inc. For decades, he has been a recognized leader in Canadian tax assisted investments, with a special focus on charity flow-through shares with an immediate liquidity provider. Through this structure, WCPD has generated more than $1 billion in flow-through financings for junior mining companies and helped raise over $300 million for charities across Canada.