Canada's planned capital gains tax hike may choke mining startups, dealmakers say

By Divya Rajagopal

TORONTO (Reuters) - Canada's capital gains tax hike for wealthy individuals and corporations in last week's federal budget risks turning away investments from mineral exploration by reducing incentives, the country's leading stock exchange operator and dealmakers told Reuters.

Prime Minister Justin Trudeau's Liberal government proposed increasing the share of capital gains subject to taxation to two-thirds for individuals with annual investment profits greater than C$250,000 ($181,752), companies and trusts, as it seeks to raise revenue to fund public programs.

The measure will be effective on June 25. The government could consider amendments.

Mining, oil and gas exploration companies listed on the TSX Venture Exchange have raised funds by issuing flow-through shares, at a premium to the trading price, that allow high net-worth buyers to take tax deductions renounced by issuers.

The minimum flow-through investment is C$250,000.

"The increase in the inclusion rate on capital gains has been characterized as 'a tax on the rich,' but it is in fact a tax hike on investing in Canada that will serve as yet another barrier to economic growth," said John McKenzie, CEO of TMX Group, parent of the Toronto Stock Exchange.

Flow-through shares account for 65% of all funds raised in Canadian stock exchanges by exploration mining companies, said the Prospectors and Developers Association of Canada, a mining lobby group.

In 2023 junior mining companies, which are still in the exploration stage, raised about C$1 billion ($729.3 million) through flow-through shares in Canada. Lithium miner Sayona Mining raised C$50 million this way for its Quebec exploration project and investors paid a 40% premium from the stock's average listed price, public filings showed.

"Exploring for resources is venture capital at its riskiest," said Ron Bernbaum, CEO of PearTree Canada, an investment manager which facilitates flow-through share sales by mining companies, noting that flow-through shares offer a "successful incentive."

Canada's exploration companies have raised only C$240 million in March, down from 79% a year ago, according to the Toronto Stock Exchange, which is home to over 40% of world's resource companies.

Industry lobby groups are hoping that the government will offer an exemption for flow-through share investors.

"If not it means the likely end of more than 70% of all resource exploration in Canada," Bernbaum of PearTree warned.

($1 = 1.3712 Canadian dollars)

(Reporting by Divya Rajagopal; Editing by Richard Chang)