Canada's capital gains tax hike is 'going to hurt' mining sector financing

Canada's planned capital gains tax hike will make it harder for the mining sector to raise funds, frustrating the government's push to bolster supply chains for materials crucial to the energy transition, industry participants told S&P Global Commodity Insights.

Canada's Liberal government introduced a motion June 10 to raise the capital gains inclusion rate from half to two-thirds in a bid to boost tax revenues by an estimated C$19.4 billion over five years. The motion to change the capital gains tax passed by a vote of 208 to 118 on June 11, clearing the way for the government to enshrine the changes in forthcoming legislation.

The move, outlined in Canada's April 16 budget, sets the stage for Canadian investors to pay more tax on investment profits. Despite some resistance from certain business groups and Canada's opposition party, the Conservatives, the legislation is likely to be approved by the governing Liberals with support of other parties.

Higher capital gains will erode the tax benefits that investors can get through popular flow-through share and tax credit policies that target domestic exploration and critical minerals. Existing pro-mining measures include tax deductions and a 30% tax credit for exploration of some minerals the government defines as critical to the energy transition, but that will be undermined by the higher tax on investments.

"It's going to hurt the amount of high-risk capital that's available to go into mineral exploration," Kendra Johnston, managing director at investment fund manager PearTree Canada, told Commodity Insights.

Tax benefits have helped Canada maintain its position as a key source of global mine and exploration financing. Canada accounted for 12.6%, or $3.56 billion, of global funds raised in the mining sector in 2023, according to S&P Global Market Intelligence data.

"The new tax complicates flow-through funding, and we are still waiting for clarity on the details from the government," David Harquail, chair of royalty and streaming giant Franco-Nevada Corp., said in an email.

Because of the tax changes, exploration companies may find they have to issue more stock than they might otherwise to raise the same amount of money, diluting shareholders, said John Burzynski, executive chairman and CEO of Osisko Mining Inc.

"It may drive some people to other places to put their money. It's certainly not helpful," Burzynski said.

In addition, the tax hike could end up working against the government's push to boost energy transition supply chains, industry participants said.

"It's ironic because it's a disconnected strategy," Burzynski said. "We want battery plants. We want green power ... but to build all those things we need the metals. And, if at the same time you're providing disincentives for mining companies, I don't see how it works."

The capital gains hike is scheduled to go live June 25.

Details to be determined

Still, industry participants expect the government to launch new policies that could help offset the impact of the capital gains tax hike on the mining sector. Industry participants, including PearTree, have discussed other potential pro-mining initiatives with government.

"Yes, we are hopeful," Pierre Gratton, president and CEO of the Mining Association of Canada trade group, said in an email.

The mining sector had hoped that the government might carve out an exclusion for miners from the capital gains tax hike, but that does not look likely, Johnston said. In outlining the June 10 motion, the government said it would release "clarifications beyond the scope of capital gains taxation to ensure Canada's mining exploration companies, which are essential to building our net-zero economy, can continue to thrive."

What measures government may craft is not clear, but they could include moves such as expanding the list of critical minerals eligible for tax benefits, industry participants said.

"What exactly those changes are going to be, and how they enact those changes, is completely up in the air," Johnston said.

Among high-impact policies the government should consider, Burzynski said he would like to see Canada mandate the country's national pension fund to finance mining companies as they do in certain other countries including Australia.

"If the government wants to truly stimulate new mines and resource growth in Canada ... they should get back to that policy of investing in the companies that are out there looking for these things," Burzynski said.

Chrystia Freeland, Canada's deputy prime minister and minister of finance, has defended the tax hike as helping the government fund programs that make life easier for more Canadians.

"Today it is possible for a carpenter or a nurse to pay tax at a higher marginal rate than a multi-millionaire," Freeland said in a June 10 news release. "That isn't fair. That is why our government is raising the inclusion rate on annual capital gains above $250,000 for individuals."

Canada's Department of Finance did not respond to a request for comment.

In anticipation of the June 25 effective date for the tax change, the flow of mining deals has picked up in recent weeks in an attempt to get ahead of the increase, Johnston said.

"I think that's going to create a bit of a drought over the summer," Johnston said. "There'll be people that still need to raise money in the fall ... but it's going to be more difficult, for sure."