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By: Liezel Hill

15th May 2009

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TORONTO (miningweekly.com) - The Prospectors and Developmers Association of Canada (PDAC) has asked the federal government to consider doubling the investment tax credit incentive for mineral exploration, to help exploration companies survive the financial crisis.

Canada's flow-through share programme is aimed at attracting investment in mineral exploration, by allowing the tax deduction on mineral exploration conducted in the country to 'flow through' to investors.

The system has been largely credited with keeping the junior exploration sector afloat in Canada after the last commodity-price slump.

However, in the current environment, investors are extremely risk averse, which means that pure exploration firms are struggling to find sources of funds.

"The ability to raise flow-through share financing has never been tougher," said KPMG tax partner Tom King.

To try and boost investment, the PDAC has approached the government to increase the investment tax credit inventive for mineral exploration, from the current 15% to 30%.

"We've asked them, given the economic concerns out there, to consider doubling that for a two-year period," said King, who is a member of the PDAC's finance and taxation committee.

This would reduce the after-tax cost to an investor, reducing the breakeven price at which the share would need to be sold to avoid a loss on the investment.

The proposal was presented to representatives from the federal government and the provinces in May, King told Mining Weekly Online.

There has since been discussion back and forth on the issue, and the response from government has been encouraging, he said.

"They are going to consider it."

The province of Manitoba, which has its own exploration tax credit system, has actually already doubled its mineral exploration credit from 10% to 20%, and plans to bump it up further, to 30%.

"So, clearly somebody is listening," King commented.

Another issue with regard to flow-through shares is that all of the funds raised have to be used for exploration activities, while the actual financing itself can be costly, with legal costs, investment agency fees and so on.

The PDAC has asked the government to consider allowing a portion of the share issuance costs to be deductible as a Canadian exploration expense.

Finally, there is uncertainty about what constitutes a new mine, for the purpose of mineral exploration spending, which affects whether the expenditure is tax deductible.

"We are asking that the procedure be simplified, so that if you are exploring on a site that was previously in production, and no production has occurred in the last five years, why not just consider that a new mine?" King said.

"This is not a time to be picky."

GEOMAPPING

Another proposal from the PDAC to government is that it accelerate and enlarge its geomapping programme, by diverting some of the funds allocated for infrastructure spending.

This would present an opportunity to employ geology students and recent graduates who, as a result of the extensive mine closures and curtailments, as well as hiring freezes implemented by many companies, would have little hope of finding employment.

"We need to keep these people in Canada, for when the boom returns," King asserted.

In fact, earlier this week. Natural Resources Minister Lisa Raitt announced that the government will spend an additional C$8-million this year - for a total of C$30-million - on its Geomapping for Energy and Minerals programme.

"The good news is that things are happening, and the government does seem to be listening," King commented.

RR