Ottawa puts an end to CEIP grant scheme, flow-through still in

for exploration Dismemberment of the Canadian Exploration Incentive Program (CEIP) by the federal government in its 1990 budget announcement follows a year in which the national financing scheme for grassroots mining exploration appeared to have a fairly strong showing. According to a spokesman with Energy, Mines and Resources Canada in Ottawa, exploration work worth a total of about $430 million was registered with the CEIP for 1989.

Chanel Boucher, director general of the ministry’s incentives branch, mineral policy sector, said by mid- February, exploration worth about $100 million had been applied for under CEIP. Ministry officials were confident applications would cover the full $430 million, all of which is eligible under CEIP.

Exploration plays last year such as the Eskay Creek gold rush in northern British Columbia and the Louvicourt Twp. base metal discovery in northwestern Quebec sparked a flurry of exploration activity in their respective regions.

CEIP was the federal government’s replacement for an earned depletion allowance scheme which provided investors in flow-through shares with a tax writeoff in addition to the basic dollar-for-dollar deduction allowed. (Flow-through- share investors in Ontario, for example, were allowed a writeoff of 100% plus an additional 33 1/3% prior to CEIP’s introduction at the start of 1989.)

The government terminated CEIP incentives for flow-through-share arrangements entered into after Feb. 19 of this year. However, eligible expenses committed to under existing agreements by investors are being respected; expenses incurred after Feb. 19, 1990, and by Feb. 28, 1991, pursuant to a “grandfathered agreement,” will continue to be eligible for CEIP payments.

Although CEIP has gone, the dollar-for-dollar deduction remains in place. Junior exploration companies can still transfer to individual investors, as a tax writeoff, 100% of their exploration expenses.

CEIP differed from the earned depletion allowance in that it was a grant program, with the grants available only to junior mining companies performing exploration work. The CEIP grant was either passed on to the investor in the form of a deduction or kept by the company, or split between the investor and company.

Operators applied under CEIP for cash grants worth up to 30% of their exploration expenditures, to a maximum annual expense of $10 million per year (that is, the maximum annual grant could not exceed $3 million), pursuant to a flow- through agreement.

The guidelines for CEIP were originally set in place for two years, and the 30% incentive rate fixed until Dec. 31, 1990. The government had said it would give six months’ notice if a rate change was contemplated.

Jake Epp, minister of Energy, Mines and Resources, told The Northern Miner that CEIP was not considered to be the most efficient use of funds. The prime motivation, he said, appeared to be not the search for new resources but as tax relief for investors.

According to the ministry, the early termination of CEIP is expected to result in annual savings to the government of $50 million in 1990-91 and $125 million in 1991- 92, after the estimated costs of grandfathering arrangements have been taken into account. Program costs, including administration, are expected to be about $160 million in 1989-90.

The two best years for flow through in mining exploration were 1987 and 1988. It is estimated the total value of flow through raised in 1987 was $950 million and in 1988, $850 million. Total exploration funding (flow-through and private combined) in 1987 is estimated to have been $1.3 billion and in 1988, $1.4 billion.

Private money in 1989 may have added another $400 million to exploration funding, bringing possible total expenditures last year to the $800-900-million range.

Donald Cranstone of Energy, Mines and Resources Canada estimated about 80% of exploration expenditures in 1988 went toward precious metals. He has no data yet to prove it but for 1989 he guessed base metal exploration, because of the higher market prices for base metals, accounted for a greater share of total expenditures.

Prior to its success in the mining field, flow-through financing played a significant part in the Canadian oil and gas exploration boom of the 1970s. Ironically, one of the most successful partnership funds in the past few years, CMP, weighted about 40% of its current 1990 resource partnership toward oil and gas exploration. Of the remaining 60%, about 45% is weighted toward precious metals and 15% toward base metals.

CMP President Jean-Guy Masse said for 1989, his company’s second-half resource partnership was weighted about 35% toward oil and gas, while the first partnership early in the year was weighted about 15% in favor of oil and gas. The second-half fund in 1989 raised $51 million and the first-half partnership, $80 million. For 1988, CMP had separate funds for mining and oil and gas.

A Montreal-based fund, QME, fell short at the end of 1989 in its quest to raise $10 million for mining exploration in Quebec; QME closed the offering at $2 million. The QME fund was different in that the participating junior companies were in a position to offer a 166/9bh/% deduction to investors on their flow- through shares.

In Quebec last year, as an additional incentive to the investment community, the provincial government decided to allow an extra deduction (on top of the dollar-for- dollar writeoff) for two types of work: 33 1/3% for investments in companies performing underground development, and 66/9bh/% for investments in companies undertaking surface exploration work.