Mining exploration and development is fraught with challenges: attracting risk capital, operating in remote locations and with limited infrastructure, permitting and regulatory certainty, to name a few. The extraction of critical minerals, indispensable in the electrification and high technology sectors, is particularly challenging, both for geographical reasons and from the perspective of financial viability.
Budget 2022 marked Canada's first meaningful steps towards prioritizing critical minerals. In this regard, highlights of the Budget include incentivizing private sector investment through a new "super flow-through" tax credit for critical minerals, infrastructure support for critical regions and investment in processing, manufacturing and recycling. In addition, the Budget announced further investment in development of a National Benefits-Sharing Framework for natural resources together with expansion of the Indigenous Partnerships Office and Indigenous Natural Resource Partnerships program. The key aspects of these initiatives for mining are outlined below.
In a measure to promote exploration for minerals critical to zero-emission vehicles and other clean technology, the 2022 federal Budget introduces an enhanced 30 percent Critical Mineral Exploration Tax Credit for specified minerals, which flow-through share investors would be entitled to receive in lieu of the existing 15 percent Mineral Exploration Tax Credit.
Under current law, investors who subscribe for "flow-through shares" in a mining company may claim a tax deduction for certain mineral exploration expenditures incurred by the company in Canada and renounced to the investor, and may also claim a 15 percent tax credit in respect of such expenditures. Under the Budget proposals, the tax credit available in respect of exploration expenditures for certain specified minerals will be increased to 30 percent.
The minerals that would be eligible for the enhanced credit are: copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium. A "qualified person" (as defined under National Instrument 43-101) will be required to certify that the exploration expenses in question will be incurred as part of an exploration project that primarily targets these specified minerals.
The enhanced tax credit would apply to exploration expenditures renounced under eligible flow-through share agreements entered into after April 7, 2022 and on or before March 31, 2027.
Detailed legislation enacting the new credit has not yet been released, but the Budget indicates that the administration of the new enhanced credit will generally follow the rules regarding the existing 15 percent credit for flow-through mining expenditures, which will remain in effect for expenses in respect of minerals other than the specified minerals listed above.
The flow-through share regime has provided meaningful incentives for private capital to pursue mining exploration and development activity in Canada, allowing mining exploration companies to raise equity at a premium to fund early-stage mineral exploration and certain development expenses. This new "super-flow-through" credit is a welcome initiative, to encourage capital investment in this critical area.
The Budget explicitly acknowledged the infrastructure challenges that accompany many resource projects. To support the development of infrastructure for critical minerals, the Budget included a pledge of up to $1.5 billion over the next seven years. This may be part of the solution to unlock value in regions with infrastructure challenges, such as the Ring of Fire in Northern Ontario.
The federal government has announced that, over the next six years, it will dedicate $1.5 billion in targeted support for innovation in relation to critical minerals projects with a priority for manufacturing, processing and recycling activities.
Against the scale of contemplated investment, with the road project to the Ring of Fire and related consultations estimated in some publications at $1.1 to $1.6 billion alone, time will tell whether these dollars can be focused in ways that make a meaningful difference in project development and innovation for this sector.
The Budget provides $103.4 million in funding for the next five years to Natural Resources Canada for the development of a National Benefits-Sharing Framework for natural resources and the expansion of the Indigenous Partnerships Office and the Indigenous Natural Resource Partnerships program. At least $25 million of this funding will be dedicated to early engagement and capacity building to support Indigenous communities in their participation in the critical minerals strategy.
Again, only experience will demonstrate whether this five-year commitment is sufficient to move the ball on furthering these key relationships to support critical minerals project development.
The meaningful encouragement of market support for critical minerals is an important step towards prioritization of these crucial commodities. Together with infrastructure development and the support for early community engagement, Budget 2022 provides encouragement to mining companies and investors seeking opportunities for Canada to play a crucial role in the growing green and high-tech economies.
Bennett Jones LLP provides market leading advice and representation for mining industry participants and their investors across a range of activities from acquisition, finance, exploration, permitting, development, operation and closure. For further information on how we can help advance your interests, please connect with our Mining practice group or contact Sander Grieve, Abbas Ali Khan, Philip Ward, Nicholas Arrigo or Sharon Singh.