Canada's planned capital gains tax hike may choke mining startups, dealmakers say

TMX

22/04/2024 20:43

By Divya Rajagopal
       TORONTO, April 22 (Reuters) - Canada's capital gains tax
hike for wealthy individuals and corporations in last week's
federal budget risks turning away investments from mineral
exploration by reducing incentives, the country's leading stock
exchange operator and dealmakers told Reuters.
    Prime Minister Justin Trudeau's Liberal government proposed
increasing the share of capital gains subject to taxation to
two-thirds for individuals with annual investment profits
greater than C$250,000 ($181,752), companies and trusts, as it
seeks to raise revenue to fund public programs.
    The measure will be effective on June 25. The government
could consider amendments.
    Mining, oil and gas exploration companies listed on the TSX
Venture Exchange have raised funds by issuing flow-through
shares, at a premium to the trading price, that allow high
net-worth buyers to take tax deductions renounced by issuers.
    The minimum flow-through investment is C$250,000.
    "The increase in the inclusion rate on capital gains has
been characterized as 'a tax on the rich,' but it is in fact a
tax hike on investing in Canada that will serve as yet another
barrier to economic growth," said John McKenzie, CEO of TMX
Group, parent of the Toronto Stock Exchange.
    Flow-through shares account for 65% of all funds raised in
Canadian stock exchanges by exploration mining companies, said
the Prospectors and Developers Association of Canada, a mining
lobby group.
    In 2023 junior mining companies, which are still in the
exploration stage, raised about C$1 billion ($729.3 million)
through flow-through shares in Canada. Lithium miner Sayona
Mining  SYA.AX  raised C$50 million this way for its Quebec
exploration project and investors paid a 40% premium from the
stock's average listed price, public filings showed.
    "Exploring for resources is venture capital at its
riskiest," said Ron Bernbaum, CEO of PearTree Canada, an
investment manager which facilitates flow-through share sales by
mining companies, noting that flow-through shares offer a
"successful incentive."
    Canada's exploration companies have raised only C$240
million in March, down from 79% a year ago, according to the
Toronto Stock Exchange, which is home to over 40% of world's
resource companies.
    Industry lobby groups are hoping that the government will
offer an exemption for flow-through share investors.
    "If not it means the likely end of more than 70% of all
resource exploration in Canada," Bernbaum of PearTree warned.
    
    ($1 = 1.3712 Canadian dollars)

 (Reporting by Divya Rajagopal; Editing by Richard Chang)
 ((divya.rajagopal@thomsonreuters.com))