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Back in January, Premier John Horgan stood in front of the leaders of B.C.’s exploration industry at the annual Association for Mineral Exploration conference in Vancouver to announce that two B.C. tax credits — among the most generous mining tax breaks in Canada — would become permanent.
It wasn’t exactly a bombshell announcement — the new policy had been recommended by an industry-friendly task force months earlier, as part of a government-led process to promote mining exploration and jobs.
Within a month of Horgan’s announcement, B.C.’s 2019 budget approved $20 million in new spending for mining, accepting multiple recommendations from the same task force.
Permanent tax subsidies go a long way to explain why B.C. is home to more exploration mining companies than anywhere else on earth.
Of the 1,200 mining companies that consulting firm PricewaterhouseCoopers estimates are based in the province, about 800 are junior companies — not miners per se, but small enterprises searching for new deposits of minerals and metals.
B.C.’s concentration of junior companies is all the more impressive given that the province holds a relatively tiny amount of the world’s reserves of metallurgical coal and copper (our two biggest mining commodities by net revenue), and Vancouver is a financial backwater compared to New York, London and Shanghai.
So why do the world’s exploration companies gravitate here?
Robyn Allan, a former president and CEO of the Insurance Corporation of British Columbia and senior economist with B.C. Central Credit Union who has written about the province’s mining industry, says there are three primary reasons why B.C. — and Canada — is a good place to call home.
“First, there is a long history of mining in Canada, and particularly in British Columbia,” she says. “There is the relative ease of becoming a publicly-traded company.”
“And then there are the tax incentives.”
Persistence of the frontier
Our long history of mining has created clusters of expertise that in turn attracts companies to the province, concentrated in greater Vancouver. If you want to start a mining business, everything you need is here: there are specialist law firms, biologists and environmental consultants for hire, accountants, auditors, chemists and geologists. There are also specialist machinery companies, transportation-logistics expertise and multiple ports.
The geology on the west side of the Rockies is much more varied than in the rest of Canada, meaning there is a variety of ore deposits. Over the last 150 years, this too has attracted a lot of exploration interest.
There is a darker side to this long history. If you’re a B.C. exploration company, in some ways little has changed since the first mainland gold rushes of the mid-19th century. You can still stake a claim to sub-surface rights almost anywhere, regardless of what’s on the surface. This includes under river headwaters and other sensitive ecological areas, First Nations traditional territory and private property.
Under B.C.’s “free entry” system, a prospector with a claim can legally access virtually any land in their quest for metals and minerals.
British Columbia remains an outlier in Canada — provinces like Ontario and Quebec have reformed their archaic free-entry rules, while the Northwest Territories is currently in the process of changing its system.
And in 2005, B.C. introduced an online staking system that makes it possible to register mining claims on a computer, without having to physically stake the ground as in the past. So staking ground and calling yourself a prospector is easier in B.C. than in many other places — and easier than ever before.
(The Association For Mineral Exploration and the Mining Association of Canada declined interviews for this story; the Mining Association of B.C. did not respond to phone calls).
All resource roads lead to Toronto
A junior exploration company, in theory, is engaged in the business of searching for new marketable deposits of ore — which, if found, will be passed on to a mining company with the ability to bring it to production.
So how do speculative prospecting companies with no producing assets or revenue streams actually make money? And what does B.C. and Canada offer that nowhere else can?
Such questions lead to the Toronto-based TMX Group — including the Toronto Stock Exchange (TSX) for more established companies and the TSX-Venture Exchange (TSXV) for mostly “juniors” — which in 2018 listed about half of the world’s public mining companies. Companies on the TSX and TSXV raised $6.5 billion in 2018 alone — a figure representing about half of global completed public mining financing and more than a third of the mining equity capital raised in the world.
“The TSX is first and foremost an institution fostering the frenzied speculation that the industry loves,” philosopher and political scientist Alain Deneault wrote in his 2015 book, Canada: A New Tax Haven. “On this exchange it is notoriously easy for a company to list presumed deposits and magnify their value.”
Deneault writes that the TSX gives juniors “more leeway than they have anywhere else to cultivate ambiguity” — because they are allowed to disclose both mine reserves and resources, the latter being a crude estimate of everything the deposit may contain. (Deneault did not respond to interview requests by press time.)
“Disclosure of resources encourages stock market speculation and makes the price of mining stocks go up,” he wrote.
He cites research showing that both the TSX and the Ontario Securities Commission, the provincial regulator, have historically been “negligent” when it comes to addressing illegal insider trading. “Unlike practice in the United States, such trading is rarely investigated.”
Tax breaks are the biggest perk
While generous provincial and federal tax breaks make Vancouver a good place to set up shop, two tax perks are particularly attractive to exploration companies.
B.C.’s mining exploration tax credit (made permanent in 2019; previously it had to be renewed annually) allows a mining exploration company to deduct a huge list of good-and-service costs from its payable provincial income taxes — including prospecting, drilling, sampling, carrying out geological surveys and much more.
There’s also an enhanced credit available that rises to 30 per cent (from 20 per cent of qualified exploration expenditures) if a company is exploring in an area affected by mountain pine beetle, which is a huge chunk of the province.
The province estimates that $15 million per year will be “provided” through the mining exploration tax credit in 2019/2020.
On the federal side, the flow through shares program provides a critical tax subsidy by enabling mining exploration companies to transfer their undeclared business expenses to the investors who buy their shares.
Purchasers of flow through shares pay extra for each share, but then are allowed to transfer and deduct mining company’s expenses as if they were their own, lowering their taxable income. B.C. also offers an income tax credit to individuals who have purchased FTS from a B.C. mining company.
(An accountant based in B.C. told The Narwhal flow through shares are typically employed by high-net worth investors in the $200,000+ income range, who can use them to lower their high taxable incomes.)
Not everyone is happy about these kinds of perks. The Organisation for Economic Co-operation and Development has criticized Canada in the past for granting “direct subsidies and fiscal incentives” to industry and has recommended that the preferential tax system for minerals and metals be eliminated.
What is a subsidy?
For 2019, the federal government estimates that flow through share deductions will total $110 million for personal income tax, and $40 million for corporate income tax.
A spokesperson for Finance Canada said that flow through shares “could be characterized as a subsidy” — something this ministry loosely defines as “a tax or non-tax measure that provides preferential treatment.”
But B.C.’s Ministry of Finance would not provide a definition of a subsidy, or confirm if its $15 million/year B.C. mining exploration tax credit is a subsidy by any definition.
For the sake of clarity, economist Robyn Allan provided The Narwhal with a simple definition. A subsidy, she said, is “anything that reduces the cost to the company benefiting from the activity, and thus incentivizes either more activity or greater [financial] returns than would otherwise be available. That’s a subsidy.”
Allan points to excellent subsidy definitions from the April 2019 report to parliament by the commissioner of the environment and sustainable development.
The most important thing to know about subsidies, Allan concludes, is who ultimately pays the cost.
“Taxpayers may bear it, sometimes the environment bears it, and in other cases, it’s a local community.”
