What is the Ontario Focused Flow-Through Share Tax Credit?

Investing in the mining sector can be complex, but certain incentives can make it more attractive. One such incentive, specifically designed for those investing in mineral exploration within Ontario, Canada, is the Ontario Focused Flow-Through Share Tax Credit (OFFTS). This tax credit provides a significant benefit to individuals who invest in flow-through shares of mining exploration companies operating in Ontario. It is a powerful tool designed to stimulate mineral exploration activity and enhance access to capital, especially for smaller mining companies.

The Ontario Focused Flow-Through Share Tax Credit (OFFTS) is a refundable tax credit equal to 5% of eligible Ontario exploration expenses incurred by qualifying mining exploration companies and renounced to individual investors. This means that if you invest in flow-through shares of a company that meets the specific criteria, you can claim 5% of the company's eligible exploration expenses in Ontario as a credit against your Ontario provincial income tax. This credit is in addition to federal tax incentives, making it a particularly appealing option for Ontario residents.

Understanding Flow-Through Shares and Their Role

Before diving deeper into the specifics of the OFFTS tax credit, it's crucial to understand the concept of "flow-through shares." A flow-through share is a specific type of investment offered by resource companies, primarily in the mining and oil & gas sectors. When you purchase a flow-through share, you're essentially providing capital to a company that has committed to spending that money on exploration activities. In return for your investment, you receive a share in the company, representing a portion of ownership.

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The unique aspect of flow-through shares is that the exploration expenses incurred by the company are "flowed through" to the shareholder. This means that the company renounces these expenses to you, the investor. This allows you, as the shareholder, to claim these expenses on your personal income tax return, providing significant tax benefits. The Ontario Focused Flow-Through Share Tax Credit builds upon this existing structure.

Eligibility Criteria for the Ontario Focused Flow-Through Share Tax Credit

To claim the OFFTS tax credit, several key criteria must be met, both by the investor and the mining exploration company. These ensure that the credit achieves its intended purpose of stimulating exploration specifically within Ontario.

Investor Eligibility

To be eligible for the credit, an individual must satisfy the following conditions:

• Residency: You must have been a resident of Ontario on December 31st of the tax year for which you are claiming the credit.
• Investment Timing: You must have purchased eligible flow-through shares after October 17, 2000.
• Eligible Corporation: The flow-through shares must have been purchased from a corporation with a permanent establishment in Ontario.
• Individual Status: The credit is only available to individuals, not trusts, corporations, or corporate partners.
• Ontario Income Tax Liability: You must be subject to Ontario income tax for the tax year in which the credit is claimed.

It's important to note that estates can also claim the credit on the final return of a deceased taxpayer, and specific rules apply in cases of bankruptcy, mirroring the federal investment tax credit regulations. Pre-bankruptcy returns are eligible, while in-bankruptcy returns and returns for a calendar year where the individual was bankrupt at any time are not.

Mining Exploration Company Eligibility

The company issuing the flow-through shares must also meet specific criteria:

• Principal Business: The corporation must be a "principal-business corporation," as defined in subsection 66(15) of the federal Income Tax Act (ITA). This essentially means its primary business is exploring for or mining minerals.
• Permanent Establishment: The corporation must have a permanent establishment in Ontario at the time the exploration expenses are incurred. This is defined in subsection 1(1) of the Taxation Act, 2007.

Eligible Mining Exploration Expenses

Not all exploration expenses qualify for the OFFTS tax credit. The expenses must be directly related to determining the existence, location, extent, or quality of a mineral resource within Ontario. This includes, but is not limited to:

• Exploration Activities: Prospecting, geological, geophysical, or geochemical surveys, and drilling (by various methods).
• Supporting Activities: Environmental studies or community consultations related to the exploration project.
• Direct Expenses: Labor and field supervision, contractor and consultant fees, supplies, and equipment rental.
• Indirect Expenses: To the extent permitted as Canadian Exploration Expenses (CEE) under federal rules: Transportation of supplies, sample analysis, food and lodging, and mobilization/demobilization of equipment and crew within Ontario. Certain overhead costs are allowed, but not head office costs.
• Sampling: "Specified sampling" costs are eligible, with limitations on the weight of samples to prevent abuse.

To be considered an eligible expense, it must also meet the following conditions:

• Incurred by a corporation in Ontario after October 17, 2000.
• Be as described in paragraph (f) of the definition "Canadian Exploration Expense" (CEE) in subsection 66.1(6) of the federal ITA, with any reference to "Canada" read as "Ontario".
• Renounced in favour of the individual (directly, or indirectly through a partnership), according to a flow-through share agreement made after October 17, 2000.
• Incurred while conducting mining exploration activity from or above the surface of the earth.

Ineligible Mining Exploration Expenses

It's equally important to understand which expenses do not qualify for the OFFTS tax credit. These generally include expenses related to development or production, rather than pure exploration:

• Existing Mines: Expenses related to an existing mine, including potential or actual extensions, are not eligible.
• Canadian Development Expenses: As defined in subsection 66.2(5) of the federal ITA.
• Exploration and Development Overhead Expenses: As defined in the regulations to the ITA.
• Capital Costs: Outlays included in the capital cost of depreciable property.
• Certain Seismic Data Costs: Including data acquired from someone who didn't perform the work or previously sold the data, and data older than one year.
• Oil or Gas Wells: Expenses related to oil or gas wells are not eligible.
• Partnership Share: The taxpayer's share of expenses incurred by a partnership (although individuals can claim the credit as members of a partnership).
• Financing Costs: Legal and financial costs related to financing the investment.

Calculating and Claiming the Credit

The Ontario Focused Flow-Through Share Tax Credit is calculated as 5% of the eligible exploration expenses for the tax year.

This is a straightforward calculation. For example, if a company incurs $10,000 in eligible expenses and renounces them to you, you can claim a credit of $500 (5% of $10,000).

The amount of the credit you receive depends on the eligible resource expenditures reported on the T101 slips (Statement of Resource Expenses) or T5013 slips (Statement of Partnership Income) you receive from the mining exploration company.

The federal credit of $142.50 and Ontario Credit of $50 will be part of the next year's total income and will be subject to tax.

To claim the credit, you must file your Personal Income Tax and Benefit return, even if you have no other income to report. You'll need to include:

• Form ON479: Ontario Credits form.
• Form T1221: Ontario Focused Flow-Through Share Resource Expenses (Individuals) form.
• Certification Documents: Either a T101 or T5013 slip, depending on whether you invested directly or through a partnership.

If your credit exceeds the amount of Ontario tax you owe, the difference will be paid to you as a tax refund after your return is assessed. It's crucial to remember that the amount of the credit claimed in a tax year reduces your cumulative federal CEE pool in the *following* year. If the pool becomes negative, that negative amount must be reported as income.

If you file a paper return, attach the required documentation. If you file electronically, keep all your documents in case the Canada Revenue Agency (CRA) requests them later.

Objections and Contact Information

If you believe you are entitled to the credit but did not receive it, received less than expected, or are asked to repay a credit, you should contact the Canada Revenue Agency (CRA). You have the right to file a formal objection to the CRA by following the process outlined in your Notice of Assessment or Reassessment.

For general inquiries you can contact the CRA toll-free at: 1-877-627-6645

Conclusion

The Ontario Focused Flow-Through Share Tax Credit is a valuable incentive for Ontario residents investing in the province's mineral exploration sector. By understanding the eligibility criteria, the types of expenses that qualify, and the calculation process, investors can maximize the benefits of this credit and contribute to the growth of Ontario's mining industry. This credit, combined with federal incentives, makes flow-through share investments a potentially attractive option for those looking to reduce their tax burden and support resource exploration.

Are there other provincial tax credits you'd like to explore to further optimize your investment strategy?

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