Abstract

Canada has historically been and continues to be a hotspot for mining finance. Mining issuers seeking capital for exploration and development expenses on Canadian projects have the option to offer "flow through" securities. Flow through financings permit investors to deduct up to the entire purchase cost of the equity acquired from issuers from such issuer's income provided the issuer expends the proceeds from the financing on certain prescribed exploration and development expenses for Canadian projects.

It is quite common for mining companies, particularly at the early stages of exploration, to not have any net income for tax purposes. As a result, such companies will often not be able to fully deduct the amount of their exploration expenditures in computing their income for several years, and in some cases may never be in a position to fully benefit from such deductions. In this regard, Canada’s flow-through share regime permits certain mining companies that are willing to forego the tax benefit associated with the deduction of exploration expenses to “renounce” such expenses to investors acquiring flow-through shares in certain circumstances.

In addition, recent focus on "critical minerals" has led to a significant tax change proposed by the Canadian federal government to the flow-through regime benefitting mining issuers exploring for such critical minerals. The proposed tax credit is called the "Critical Mineral Exploration Tax Credit" or CMETC. CMETC will provide a significant financing opportunity for junior mining issuers at the exploration stage focused on critical minerals and an attractive investment opportunity for investors.

On the other hand, the Canadian federal government has recently articulated a policy evolution to its approach reviewing foreign investment, with an increased focus on national security. On October 28, 2022, The Minister of Innovation, Science and Industry and the Minister of Natural Resources issued a statement announcing the adoption of the Policy Regarding Foreign Investments from State-Owned Enterprises in Critical Minerals under the Investment Canada Act (Critical Minerals Policy).

The Critical Minerals Policy begins with a statement recognizing that Canada’s future prosperity and leadership with respect to emerging low-carbon and other technology sectors requires reliable market-based access to critical minerals across the value chain, and that critical minerals are vital inputs to defence and high technology industries. In this context, some investments into Canada by SOEs can be motivated by non-commercial imperatives that are contrary to Canada’s interests, in particular, by non-likeminded governments. As a result, Canadian mining issuers involved with critical minerals should be mindful about how the Canadian federal government views foreign investment in their industry.