Peter Nicholson, President and Founder of WCPD Inc, details the evolution of tax in Canada and explains how it is helping the critical minerals industry to thrive.
Innovation can take on many forms, whether it be in science, health, or technology. And while they are all very different, what connects them is the sense of wonder, excitement, and curiosity it creates in us. It is not surprising that innovation in tax policy has been left out in the cold.
After all, income tax is a bill we all hate to pay. We all know the saying that there are two inevitabilities in life – death and taxes. So how could innovation be tied to something so unpleasant? So finite? Well, I am of a different mind.
As someone who has specialised in tax for over 35 years, I can tell you that, if you are Canadian, that bill you hate to pay can unlock innovation for you, the charities you care about, and even help support green technologies of the future. But first, allow me to start at the beginning.
Evolution of tax in Canada
In the summer of 1917, Canada was in the grips of the First World War. While it is hard to imagine today, Canada was one of the least taxed countries in the world. Struggling to pay for the mounting costs of war, Parliament passed the Income War Tax Act, the first direct federal tax on income. Most importantly, at least for the purposes of our story, it introduced the first tax receipt for charitable donations. For every dollar you donate, Canadians would now receive a 100% tax deduction (equal to 50% tax credit/tax savings). In a world ravaged by war, it was a much-needed boost for causes and social services.
The next milestone in this story would not happen for almost 40 years. From British Columbia in the West to Nova Scotia in the East, to Nunavut in the North, and everything in between, Canada is blessed with an abundance of natural resources. The government realised this early on, but the question was: how do you efficiently get these resources out of the ground, to build the economy? The answer was flow-through shares.
Incentives for mining investment
In 1954, this innovation in tax policy gave Canadians a 100% tax deduction if they invest in treasury shares of junior mining companies during the exploration phase. The policy allowed these mining companies to pass along the exploration expenses as a tax deduction for Canadian taxpayers, and in return, the miners could take that capital and explore for the next big deposit of gold, copper, zinc, nickel, and many other minerals and resources. And the idea worked beautifully. In the decades that followed, Canada became a world leader in mining, generating hundreds of thousands of high-paying jobs and billions in tax revenue for the government when newly discovered mines came into existence. The downside? You were now the proud owner of volatile junior mining stocks, and therefore, taking on significant stock market risk.
The investment tended to fall into two categories: a homerun or a strikeout, dependent on whether that company found the next big deposit or just dirt. Fast forward another 50 years, and that is where I came in, along with my firm Wealth, Creation, Preservation & Donation (WCPD) Inc.
Wealth, Creation, Preservation & Donation (WCPD) Inc.
In the May 2006 Federal Budget, Prime Minister Stephen Harper announced his government would remove the capital gains tax on listed stock donations to charity in order to promote more giving. For regular Canadians, this seemingly obscure shift in philanthropic policy probably did not mean much, but for WCPD Inc., it would be the catalyst for an entirely new industry.
A day after the Federal Budget, my firm made financial services history when Dr Earl Wynands, an eminent anesthesiologist and Order of Canada recipient, participated in the first flow-through share donation without paying a capital gain.
Once flow-through shares are purchased by our clients, they do not hold them for long – often less than a minute. The buyer can then sell their shares, at an enticing discount, to a third party, or liquidity provider, thus eliminating any stock market risk for the investor or donor. Remember the homerun or the strikeout? Now, with the liquidity provider, we could let our clients hit a double – every time.
Charity flow-through shares
You can also donate the shares to a registered charity. The charity then sells the shares at the same discounted price, to the liquidity providers. These liquidity providers are usually expert mining institutional investors with a long-term investment horizon. Meanwhile, the liquidity provider takes on the stock risk for the standard four-month private placement hold period. For most of our clients, this is a key benefit – no stock market risk.
Together, by combining these two tax policy deductions (flow throughs and donations) our clients, on average, can give up to three times more to their charities or foundation, at no additional cost due to the tax efficiency. In some situations, our clients decide to keep a portion of the cash from the liquidity provider sale to make a positive investment return via tax savings.
The numbers speak for themselves – as an industry, this innovation has generated billions in financing for Canadian junior mining, sustained hundreds of thousands of jobs, and as a cherry on top, created billions more in donations for charities.
The key factor here is having the tax to pay. But if you make over C$250,000 a year or sold an asset and have a large capital gain, charity flow-through shares with an immediate liquidity provider have become a trusted, mainstream method to safely reduce tax in Canada.
One of the most common questions I receive from clients is: is this a loophole? Well, a tax loophole implies you are somehow cheating the system, and the government is temporarily unaware of your activity. This structure is exactly the opposite. The government knows exactly how these policies work. Canada wants more drilling – and more giving. And why not? We are doing the government’s work. In fact, this story of innovation is only getting more interesting.
Tax drives Canada’s critical minerals supply chain
In the last Federal Budget, April 2022, the government added a new layer to this policy with the Critical Mineral Exploration Tax Credit (CMETC). Explorations involving critical minerals, such as copper, nickel, lithium, uranium, and cobalt, will now kick out a new 30% tax credit (equivalent to a 60% tax deduction), on top of the existing deductions of tax in Canada.
Our government has made a firm statement – Canada will be a world leader in critical minerals, so we can be at the forefront of technology and the future green economy. Computers, smartphones, electric car batteries, solar panels, and medical equipment are all dependent on critical minerals. They are the building blocks of products and services we depend on.
Never before have Canadians from all walks of life been so united on the importance of mining. It cuts right to the core of our national security, whereby Canada and its allies can rely on themselves, rather than less friendly nations (such as China and Russia) for our critical minerals.
“Critical minerals present a generational opportunity for Canada in many areas: exploration, extraction, processing, downstream product manufacturing and recycling,” said Natural Resources Minister Jonathan Wilkinson last December. “This federal government is committed to seizing this opportunity in a way that benefits every region across the country.”
Perhaps, it is time for tax policy innovation to come in from the cold. It makes sense, in a way. Tax is ubiquitous – it is something almost all of us have to pay. The fact we hate to pay it only creates that sense of innovation. How can we use tax to solve society’s problems?
More than 100 years later, from the First World War to critical minerals, this story of innovation of tax in Canada continues. In an unusual twist of fate, that income tax bill we hate to pay could actually be the spark for a better future.
About the author
Peter Nicholson is the President and Founder of Wealth, Creation, Preservation & Donation (WCPD) Inc. For decades, he has been a recognised leader in Canadian tax-assisted investments, with a special focus on charity flow-through shares with an immediate liquidity provider. Through this structure, WCPD has generated more than C$1bn in flow-through financings for junior mining companies. Through his work with donors, foundations and boards, the firm has also helped create over C$300m for charities across Canada.
Please note, this article will also appear in the thirteenth edition of our quarterly publication.