Monday, October 31, 2016

"Super" Flow Through Tax Shares & Why Space Companies Need Them

          By Chuck Black

The Prospectors and Developers Association of Canada (PDAC) has begun its annual public lobbying effort to insure that Canada’s mineral exploration tax credit (METC), a program formerly known as the investment tax credit for exploration (ITCE) and more generally as the "super" flow-through shares (FTS) program, remains a part of Canada's tax code for another fiscal year.

While Canada might not understand the functional similarities between mining and space activities, other countries certainly do. As outlined in the October 26th, 2015 post, "Say Hello to the New US Commercial Space Launch Competitiveness Act," the US government recently defined and codified the ability of individuals and the private sector to stake claims over space based assets in a manner consistent with existing US mining law, which should give US based companies such as Deep Space Industries and Planetary Resources a "first mover" competitive advantage in the new industry. As outlined in the February 3rd, 2016 Space News post, "Luxembourg to invest in space-based asteroid mining," Luxembourg has announced similar measures. Graphic c/o Planetary Resources.

As outlined on the PDAC website, super flow through shares help the Canadian mining industry to self-fund projects and grow smaller companies. Canada has one of the largest global mining supply sectors with more than 3,700 companies supplying engineering, geotechnical, environmental, financial and other services to mining operations. These firms contributed $57Bln CDN to Canada’s gross domestic product (GDP) in 2014. according to the Mining Facts website.

But the mining industry also possesses more than a passing resemblance to the much smaller Canadian space industry (200 companies contributing $3.3Bln in 2013 according to the the Space Economy at a Glance 2014). Both possess inherent risks, require high-up front costs, and have long lead times before any return on investment could reasonably be expected. And both engage in resource exploitation.

Would the space industry benefit from the same taxation regime which has benefited the mining industry?

The first peer reviewed paper to make an explicit, demonstrated and causal connection between mining and space activities was the 2005 paper “Historical Investment Financing of Exploration for New Worlds, Current Analogies to Other Industries, and Ideas for the Future,” which was initially presented at the 7th International Lunar Conference in September 2005 and then revised for presentation at the 25th Annual International Space Development Conference (ISDC 2006) in May 2006.

A 2008, a second paper, initially presented at the 2008 Canadian Space Summit under the title, “Creating A Robust Canadian Space Research Exploration & Development Industry - The Canadian Mineral Industry Flow-Though Share Analog,” made explicit the causal connections between the successful Canadian mining industry and specific Canadian tax code provisions. As outlined in the paper, other industries, such as the space industry, could use the concept of flow through shares to mitigate the investment risk traditionally associated with taking a speculative position in junior companies.

The PDAC webpage focused around "super" flow through shares, highlighting the PDAC pre-budget submission for Budget 2017, along with case studies and an overview of their effect on the mining industry. As outlined in the May 17th, 2004 Northern Miner post, "Flow-through shares: a history," the concepts behind flow through tax credits have been around for 50 years and are well known. They're intended specifically to reduce "the risk for investors, thereby encouraging them to take a speculative position in junior companies." This is the opposite of  traditional methodologies used to grow the Canadian space industry, which focus around "capacity building" or the creation of one or two large firms, through the use of selective government contracts and funding. Screen shot c/o PDAC.

By 2012 the Canadian Space Commerce Association (CSCA) felt comfortable enough with the concept of super flow through tax credits to include a request for them among the recommendations it presented to the David Emerson led Aerospace Review

As outlined in part two of the three part CSCA submission under the title, "Using Tools from the Mining Industry to Spur Innovation and Grow the Canadian Space Industry," Canada "has unparalleled expertise in all areas of terrestrial mining and this expertise has been developed through a national tax and legal infrastructure which helps to fund new start-ups and grow existing players."

The submission went on to say that, "a similar tax and legal framework would allow our indigenous space sector to self fund exploration, innovation and development in the very same way that those equivalent terrestrial functions are currently self funded in the Canadian mining industry."

Since then, although other nations (such as the US and Luxembourg) have begun to make the connections between mining, exploration and space, nothing further has happened in Canada. 

Here's hoping the situation changes soon. 

Canada needs more discussion on how to expand our space activities through self-funding and less discussion on "capacity building," or "collaborating," or contributing components for projects designed and led by others.
Chuck Black.

Chuck Black is the editor of the Commercial Space blog. He also wrote the second of three CSCA submissions to the 2012 Emerson Aerospace Review.

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