Flow-through’s contribution positive, says PDAC

Is flow-through funding the magic formula that led to the discovery of billion of dollars worth of ore or another government scheme plundered for the benefit of the few?

Once again the pros and cons are being debated. This time the “pros” are given fresh ammunition in a report produced by Fenton Scott, president of the Prospectors and Developers Association of Canada (PDAC). The report provides an invigorating analysis of how the mining industry and government have reaped a rich harvest.

The bottom line of Scott’s analysis shows a net cost to governments during the 7-year flow-through period of 1984-90 of $460 million. It also shows a net estimated return to governments from the 29 flow-through mines started up, or announced prior to 1991, of $4.5 billion. These figures give a 10-to-1 return on government investment.

Of the 29 mines listed, 14 are currently “active” — two are at the feasibility stage, two are under development and 10 are operating. The remaining 15 are suspended. Despite the suspended operations, Scott’s analysis remains unscathed. Thus, if just the 14 active operations are considered, the government’s net return will still be an estimated $3.9 billion compared with the above-noted $4.5 billion.

The analysis uses overall factors to arrive at, for example, the gross values of the ore in the ground, the tax component of metal prices, the tax returned by exploration activities and capital gains on stock sales. Critics will have differing views on what these factors might be, but it is unlikely the essence of the analysis will suffer as a result.

On the other hand, Scott’s assessment of government’s total investment, or stated in a different manner, the government’s sacrifice of tax revenue to support flow-through financing, is at a major variance with the estimates of others.

In the “simplistic” (Scott’s terminology) methods used by others, it is assumed that all flow-through shareholders were in the 50% marginal tax bracket. The total investment in flow-through shares during the 7-year period under review was $3.75 billion (Energy, Mines and Resources Canada figures). After deducting 15% for commissions, accounting and legal services and so on, the government’s investment was 50% of $3.19 billion or $1.59 billion. By Scott’s analysis, the amount is actually $524 million.

Because of the gross disparity in numbers, Scott’s approach is quoted here in full: “A high-bracket taxpayer who has $10,000 earnings would normally pay $5,000 tax. A high-bracket taxpayer who purchased $10,000 flow-through shares and having the advantage of the 133% Mineral Exploration Depletion Allowance (MEDA) would pay $3,600 tax. Thus the `loss to Revenue Canada’ would be $5,000 minus $3,600, or 14% of $10,000. Under this scenario the government tax investment cost would be $524 million.” (The $524 million is reduced to $460 million through tax revenues generated from exploration, capital gains from stock transactions and other related activities.) Abuse of flow-through financing has been well aired. Less well aired are two vital gains that resulted from the government’s initiative — important discoveries were made and new mines are now operating, or soon will be. Nor does the argument carry weight that the orebodies would have been found in the normal course of time without government incentive. Most would be found in time, true, but would they still be economic when that time arrived?