Will Changes to Canada's Capital Gains Tax Hurt Mining Investment and Innovation?

The Liberal government’s ongoing deficit was also a target of analysts and experts.

“The entire budget proposal is a disaster, worse than my already low expectations,” Rick Rule, proprietor at Rule Investment Media, told the Investing News Network. “When might the budget balance itself? Never!”

Rule was also critical of the proposed capital gains tax reform.

“The government taxes success to subsidize failure, reducing that amount of capital available to successful, experienced investors to be allocated by political hacks, with investment track records unblemished by success," he said.

Mining sector fears loss of investment and innovation

The 2024 spending plan prompted other reactions from the mining sector as well, with the Mining Association of Canada (MAC) and the Prospectors & Developers Association of Canada (PDAC) both releasing statements.

The MAC pointed to the government’s plans to extend the Mineral Exploration Tax Credit (METC) until March 31, 2025, as a win for the junior mining sector, but noted that the decision to increase the inclusion rate for corporations and trusts, as well as individuals, could significantly diminish the effectiveness of the METC.

“(The) budget has pros and cons,” said MAC President and CEO Pierre Gratton.

Aside from the METC extension, the MAC said the pros include changes to the Clean Technology Manufacturing Investment Tax Credit (CTM-ITC), which will now include the cost of eligible property primarily used for producing qualifying critical minerals, provided that at least 50 percent of the production value is dedicated to this purpose.

This update reflects concerns raised by MAC earlier this year — the original CTM-ITC proposal had suggested a 90 percent threshold that the MAC said would have significantly restricted the tax credit's applicability and effectiveness in encouraging new investments in mining and mineral processing.

“The proposed new threshold for the CTM-ITC is welcome, but the changes to capital gains may undermine the METC and harm mineral exploration financing,” explained Gratton in his statement. “We applaud the government’s ambitions with respect to project timelines, but the real success will come down to implementation; we look forward to working with the government to make sure that mines in Canada can be approved and brought online in timelines that are more responsive to the urgent need for Canadian minerals and metals.”

This sentiment was echoed by PDAC. The mineral exploration and development organization, which has more than 7,000 members globally, acknowledged that the METC term increase is a beneficial milestone for the nation’s exploration sector, but expressed concerns about the capital gains tax adjustment.

“Such an increase will reduce the amount of available capital for junior exploration and development companies and create major headwinds for investment into Canadian industry more broadly,” warned PDAC.

“Without careful consideration, the proposed tax increase could put us on track to fall short on the critical mineral and other federal strategies, and we cannot risk losing momentum in building our capacity to discover and connect new mineral deposits to domestic supply chains," the organization also notes.

In February, ahead of the proposed federal budget, PDAC issued a list of six recommendations.

Its suggestions are primarily focused on fostering growth and innovation within the Canadian mineral exploration and mining sector. It includes proposals related to tax measures, regulatory enhancements, research and development incentives, infrastructure investments, Indigenous engagement and international trade promotion.

Related to the capital gains tax, the organization proposed the following: “That the government adjust the capital gains tax treatment for flow-through shares to reflect the issue price of the security versus the current nil cost base approach to expand participation in this funding mechanism by a broader base of investors within Canada."

PDAC also emphasized the importance of supporting the mining industry's competitiveness, sustainability and contribution to economic development and job creation in Canada.

“PDAC will be unwavering in voicing how uniquely Canadian investment incentives like flow-through shares and exploration tax credits must remain well-oiled and ingrained in our financial landscape,” the statement reads. “And we will remain steadfast in our call that Canada must expand its public geoscience knowledge-base and incorporate this information into our national strategies and land management processes.”

For Brian Leni, editor and founder of Junior Stock Review, the government’s move to change capital gains tax rubric is likely to weigh heavily on the already challenged junior mining landscape. “Money flows to where it is treated best,” he told the Investing News Network via email. “I don't think this situation will be any different.”

In recent years, Canada’s junior mining sector has faced various challenges, including regulatory complexities, limited access to capital and volatile commodities prices.

“Canada's position as a top-tier destination for mining investment continues to erode,” continued Leni. “Raising the capital gains tax on the group of investors who infuse the most amount of money is a grave mistake, but unfortunately, I wouldn't expect anything less from the government. That isn't a bipartisan comment either, left or right. With debts at all-time highs, inflation still persistent, to me it's just a matter of time before they come for us all.”