Industry embraces CEIP, companies seek grants

More than 160 flow-through share agreements have been filed with CEIP by companies involved in mineral exploration this year. The total value of the agreements is $126.3 million.

“Industry has accepted the program and are determined to make it work,” says McLean. “Now the only thing is to convince investors that it (CEIP) is a viable investment vehicle and that’s just a matter of reversing some of the external factors. If the Vancouver market turns around, if the price of gold goes up, if there’s a major find — all these spur interest in flow- through.”

More than 300 people have attended the free seminars that Energy Mines and Resources officials are holding across the country to explain the whys and hows of CEIP. The seminars consist of an overview of the program’s key concepts and workshops explaining program administration, eligible expenses, flow-through share agreements, annual expense limits and application procedure. Comparisons to MEDA

CEIP is designed to raise funds for companies exploring for minerals, oil and gas by offering a cash incentive of 30% of exploration costs. The program emphasizes grassroots exploration by junior companies and replaces the Mining Exploration Depletion Allowance (MEDA).

“There’s really one fundamental change between MEDA and CEIP,” says McLean. “Under MEDA an investor would gross-up by 331/3% the exploration expenses renounced to him by the corporation. If he invested $100 in flow-through shares, he would receive a tax write- off of $133.33.

“With CEIP, rather than pay through the tax system, we pay out a cash contribution. If the investor puts $100 into flow-through shares, and the company elects to flow- through the money to the investors, the investor would receive a Canadian Exploration Expense tax credit of $70 — $100 less the CEIP contribution of $30. He wouldn’t receive as much of a tax break, but he would have $30 in his pocket.”

McLean admits that CEIP hasn’t stirred the same excitement in investors that MEDA did.

“It’s fair to say that the interest hasn’t been as great as it was in 1987-88, but those two years were exceptional. The interest is more in line with earlier MEDA years like 1983-84.” Eligible expenses

Any corporation that has incurred eligible exploration expenses (EEE) while searching for minerals on or after Jan 1 of this year, and has issued flow-through shares, qualifies for the CEIP incentives, subject to certain conditions.

Eligible expenses are defined as having been incurred “for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada.”

Once a company enters into a flow-through share agreement with its shareholders, it has 60 days to notify CEIP. To qualify for the CEIP grants, the flow-through shares must not be preferred shares, that is, the investors must be “at risk” by the venture.

CEIP will cover 30% of the EEE and that rate is guaranteed at least until Jan 1 1990. Up to $10 million of exploration expenses may be eligible for the CEIP incentives each year which means a company may obtain a maximum of $3 million in CEIP funds. Associated companies must share this spending cap.

Above ground expenses include costs of prospecting, line cutting, geochemical and geophysical surveys, drilling and trenching. Underground expenses include construction of exploration shafts, adits and decline ramps, exploration drifting, raising and cross cutting, drilling and bulk sampling. Other costs such as site preparation, temporary road construction, camp costs and aircraft charters are eligible as well. Exploratory work at abandoned, past-producing mines also qualifies for CEIP grants.

Expenses are ineligible if they are related to a commercially producing mine, seek to extend or define known ore reserves, or are considered pre-production or development costs. Capital costs of equipment are also ineligible.

An important advantage of CEIP over its predecessor is that expenses need not be on the exploration property to qualify for grant money. Therefore, salaries of head office personnel qualify for CEIP grants in proportion to the time that they spend working on the project at head office. Similarly, computer time devoted to the project qualifies for grants.

The EEE must be incurred by the flow-through shares issuing corporation, a joint venture partner or a corporation related to the issuing corporation — what is known as `stacking.’ Stacking allows a company to use the EEE renounced to it by a related company to apply for CEIP grants, providing the companies share a flow-through agreement. Companies are defined as `related’ if one company owns 50% or more shares in the other. Exemptions and enforcement*

Eligible expenses are assessed by the companies themselves but CEIP maintains a team of experienced inspectors to assist and monitor projects.

“Enforcement of CEIP will be more rigorous (than MEDA),” says McLean. “We have an audit program to ensure that the expenses being claimed are within the processes of the CEIP program and in some cases we will actually go out into the field and do the inspections.”

If requested by a company, CEIP will issue advance rulings on how a company’s application will be interpreted. These advance rulings will allow the company to better plan an exploration strategy.

Individuals, tax exempt corporations, and corporations more than 50% owned by South African citizens or corporations do not qualify for CEIP grants. Nor are projects that receive grants under the Canadian Exploration and Development Incentive Program (CEDIP) eligible to receive CEIP grants. Projects claimed for CEDIP grants must be included when determining the $10-million annual expense limit.

Applications for CEIP grants must be made to the office responsible for the project area and no later than 12 months after the calendar year in which the expenses were incurred. For projects in British Columbia, Alberta, Saskatchewan, Yukon Territories and the western Northwest Territories applications should be sent to CEIP’s Vancouver office. The CEIP office in Kirkland Lake, Ont., administers Ontario and Manitoba while an office in Val d’Or, Que. serves Quebec and the eastern Arctic. A St. John’s, Nfld., office serves Newfoundland and Labrador and the Saint John, N.B., office covers the remainder of the Maritimes.

CEIP operates a toll-free number to answer queries, 1-800- 267-7654.

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