A Canadian company looking to advance a major B.C. mining project has won an appeal against the province after it denied the company tax credits for millions of dollars of exploration work.
The case, handed down by B.C. Supreme Court Justice Miriam Maisonville last month, centred around more than $15.7 million in expenses Seabridge Gold Inc. (TSX:SEA) said it incurred in the exploration of its KSM mine during the 2010 and 2011 taxation years.
Located 950 kilometres northwest of Vancouver, Seabridge bought the KSM property in 2001. It is one of the largest undeveloped gold mining projects in the world.
About 15 years ago, the company said it hired several contractors to determine the “existence, location, extent, or quality of a mineral resource in B.C.” and so should have qualified for B.C.’s mining exploration tax credit (METC).
The credits reduce taxes related to a qualified company's mining exploration expenses by 20 per cent, according to the B.C. Ministry of Mining and Critical Minerals. The program applies to exploration for all base and precious metals, coal and some industrial minerals. Drilling expenses for oil and gas have been excluded from the tax credit since Feb. 22, 2024, according to the ministry.
In court, both sides agreed that the tax credits were put in place to encourage and increase mine exploration — a uniquely high-risk activity with a standard success rate of less than one in a thousand, according to one source cited by the judge.
“This risk is exacerbated by the high cost of exploration activities, which often require significant capital expenses by firms,” wrote Maisonville.
Past decisions reduced company's tax credit by $3.1 million
During the tax years in question, Seabridge said it carried out a variety of field work to understand the extent of minerals at the site. That included geo-technical drilling and sampling; testing of groundwater and glacier studies to understand the location and cost of getting to the deposits; and metallurgical testing to understand the quality of the metals.
The company collected economic data to understand capital and operational costs to process metals and protect the environment. And other studies analyzed what would be required to power the mine, divert water and avoid hazards.
All that work was contracted to a number of consultants at a cost of nearly $8.6 million in 2010 and $7.2 million in 2011, according to the ruling.
But the province denied the expenses were incurred to determine the existence, location, extent or quality of the deposits – key requirements if a company is to be deemed eligible for the tax credits. And in 2016, a notice of reassessment reduced Seabridge’s tax credit by more than $3.1 million across the 2010 and 2011 tax years.
Seabridge objected to the reassessment. The province, on behalf of the Minister of Finance, reaffirmed its decision in 2019, noting the pre-feasibility work to survey whether the company could extract the minerals in an “economically viable way” was disallowed by the Canada Revenue Agency.
At the appeal hearing, the province argued that studies to assist in determining the options and profitability of a mine development were not covered by tax law.
Seabridge, in contrast, argued that expenses eligible for the tax credits should include a wide range of mining exploration activities.
Determining the 'quality' of a 'mineral deposit' ruled to include a broad range of activities
At several points in her ruling, Justice Maisonville interpreted definitions from the Encyclopedia Britannica to define what counted as a “mineral deposit” and what the word “quality” really means under tax law.
She concluded that a deposit of a precious metal does not simply end at one point underground, but rather only gets less concentrated until it is no longer commercially viable. What matters in defining a mineral deposit is that it has a reasonable prospect of getting exploited, she said.
Meanwhile, “the quality” of something could refer to its market value (a quality investment) or to the durability or sharpness of a “quality knife,” wrote Maisonville. Context matters, the judge said in her ruling.
“Excellence can only be assessed relative to a purpose or objective; for a kitchen knife, that purpose is for chopping and slicing. For an investment, it is generating financial returns,” she wrote.
The judge agreed with Seabridge that tax legislation should be interpreted as trying to capture a “broad array” of activities needed to lower the risk that a mineral resource may not in the end be economically viable to mine.
Under B.C.'s tax law, determining a quality deposit should include factors such as operational costs, capital costs, grade of the mineral, accessibility, chemical composition and environment risks, wrote Maisonville.
Only one pre-feasibility study was found not to qualify for tax credits.
Tax agency reviewing decision
A spokesperson for the B.C. Ministry of Finance said income tax appeals are administered by the Canada Revenue Agency and the Department of Justice on the province’s behalf.
“As the time to appeal has not expired, any questions regarding this decision should be directed to the Canada Revenue Agency and it would not be appropriate for the province to comment at this time,” the spokesperson wrote in an email.
CRA spokesperson Déborah Cléry said the tax agency is reviewing the court decision and is still considering its next steps.
“The confidentiality provisions of the laws we administer prevent the CRA from disclosing taxpayer information and as a result, we do not comment on the specific details of court cases,” Cléry said.
Critics say tax law needs update to target critical minerals
BIV reached out to Seabridge asking how the ruling would impact the company's finances as well as the mining industry more widely. A spokesperson for the company declined to comment.
Unchallenged, the Seabridge case could significantly expand the amount of tax money mining companies can avoid paying government, said Jamie Kneen, national program co-lead of MiningWatch Canada.
Kneen said the amount of tax money that is already foregone by government treasuries to support mining is not well monitored but is almost certainly “substantial.”
“We can’t find out,” he said. “But it’s thousands of companies getting breaks on taxes.”
Kneen said Canada’s tax law has fallen behind stated government policy to focus support for mining companies seeking critical minerals — key building blocks required in everything from industrial-scale batteries and solar panels to fibre-optics and night-vision goggles.
“If we want companies to prove a resource that seems to exist, what’s the best policy approach to do it? Is it just tax money or is there a more targeted way to get critical minerals,” he said.
“We might want to focus on that specifically.”
