Ontario may compensate for loss of flow-through

The Ontario government will be pressuring the federal Finance Department to rescind its plan to weaken flow-through share financing for mineral exploration, the province’s mines minister has announced. He added that his government is examining options (in the form of possible or existing programs) for compensating for the planned reduction of the tax incentive.

On a recent tour of northern Ontario, Sean Conway said he was very concerned that the federal government appears to be abandoning the flow-through share incentive, which he described as “a tremendous boon for mining exploration in Ontario and elsewhere in Canada.

“We all know substantial pools of capital are required for exploration, and flow-throughs have provided that capital,” Conway told reporters in Timmins, Ont. “The federal government is not listening to the concerns of the provincial governments and the mining communities.”

The final draft of Finance Minister Michael Wilson’s tax reform package, unveiled last month, retains the actual concept of flow- through but in a less generous form:

Under current flow-through rules, each dollar invested by an individual in Canadian mining exploration provides a tax writeoff of $1.33. The tax reform package calls for the end of “earned depletion allowance,” which provides a tax writeoff in excess of the amounts actually spent for exploration and development. (The allowance is so-named because it recognizes the depleting nature of a mining operation’s raw material.) Phase-out

However, under tax reform, the rate at which depletion can be earned would be slashed to 16 2/3% from 33 1/3% by July 1, 1988. It would be phased out completely as of Dec 31, 1989. In other words the total tax writeoff would be cut from the current $1.33 to $1.17 by July 1, 1988, and to a dollar-for-dollar deduction by Jan 1, 1990.

There has been considerable debate in the mining industry as to the future of flow-through shares. Some representatives of provincial governments and the private sector believe the elimination of earned depletion would make it much more difficult for junior companies to raise equity capital through flow- through shares, and that tax incentive would eventually die. Others are predicting a 100% deduction would continue to be very attractive.

Conway said mining is a risky business at the best of times, and as such should have a “good tax environment,” as exists under the current flow-through share structure.

Following his tour, he told The Northern Miner his ministry is considering a number of programs, including the Ontario Mineral Exploration Program (omep), which might be used to help compensate for the planned phase-out of earned depletion. (Omep offers grants or tax credits to non-producing companies or individuals for exploration work performed in Ontario.) OMEP

When asked whether there are plans to restructure omep or introduce a new tax incentive program at the Ontario level, Conway said: “It would be unrealistic to expect that provincial governments are going to be able to fill the gap created by the loss of the flow-through share incentive. I don’t want to create that expectation.”

When asked whether Ontario would follow the approach, formerly used in Quebec, of offering an additional depletion allowance on top of the the one offered federally, he replied: “I will only say that because Quebec collects its own income tax, there are certain administrative opportunities there that are not easily available in other provinces.”

He added he will soon be meeting with Raymond Savoie, Quebec’s minister of mines, to ascertain what that province’s intentions are. Savoie has spoken out strongly against the phase-out of earned depletion.

During the next few weeks, Conway said, he will be analysing the final draft of Wilson’s tax reform package to determine precisely what impact the proposals would have on the mineral exploration business. “It’s a complicated issue,” he mused. ‘`It’s not just earned depletion which is involved; there are related aspects of the whole tax reform package which may well have an impact on mining.”

(One of those aspects is new rules which limit the ability of investors to shelter their flow-through shares from capital gains tax. See N.M., June 29/87.) Election issue

One thing is clear, according to Conway: “Mr Wilson has turned a deaf ear to those who have been lobbying for the retention of the earned depletion allowance. What’s more, this is likely to be an election year, (at the federal level) and there is no question that tax incentives, as they relate to mineral exploration, will be an important issue — at least in northern Ontario. On my tour, the issue of flow-through was raised repeatedly, by representatives of municipal councils, by mining companies, by labor groups, etc.”

He called the mining sector very important to Ontario, and especially to mining communities like Timmins, Kirkland Lake, Marathon and Sudbury.

Conway spoke in Timmins during a 10-day tour of northern Ontario — his first since becoming mines minister Sept 29. The tour also took him to Fort Frances, Red Lake, Pickle Lake, the Hemlo area, Kirkland Lake, Elliot Lake and Sudbury before returning to Toronto last week.

Conway said it was his first opportunity, as mines minister, to travel in the north. The main reason is that he is also government house leader and must be present when legislation is in session. Photo by Brown, Melvin & Associates Ontario Mines Minister Sean Conway Sean Conway, Ontario mines minister