Flow-Through
Eligible Expenses
The Canadian Income Tax Act permits certain eligible expenses to be “flowed-through” to investors to be tax deductible in their hands in order to incent investment in Canada’s junior mineral and energy exploration sector.
A Canadian Exploration Expense (“CEE”) is any expense incurred for the purpose of determining the existence, location or quality of a mineral resource in Canada. These are exploration expenses and, if conducted from the surface (“grass-roots exploration”), will qualify as Flow-Through Mining Expenditures (“FTME”) that attract a 15% federal Investment Tax Credit (“ITC”) for precious metals and since 2022 30% for eligible critical minerals. Depending on the Canadian Jurisdiction in which the exploration takes place, an additional ITC and other tax incentives may be available which varies from province to province. Grass-roots exploration attracts the full suite of government tax incentives and is known as “Super Flow-Through”. Sub-surface exploration does not attract additional tax incentives and is known as “CEE Only Flow-Through”.
A Canadian Development Expense (“CDE”) is any expense incurred for the purpose of bringing a new mine into production in reasonable commercial quantities. These pre-production mine development costs, also applicable to development of new energy resources, do not attract additional tax incentives and are deductible at a rate of 45% in the first year and 30% in subsequent years on a declining balance basis as opposed to CEE which is 100% deductible in the current year.
