Cleantech companies want in on mining’s favourite tax incentive
Ability to sell flow-through shares proposed
Cleantech firms are calling for the federal government to let the sector offer investors a tax advantage widely used by junior mining companies when it delivers its budget this spring.
Selling flow-through shares, which allow companies to pass on some of their expenses to investors for tax purposes, would provide firms working on emissions-reduction and other environmental solutions a new way to fund capital-intensive development. The proposals come as policy-makers and investors plan for a climate-focused post-pandemic economic recovery.
The flow-through share system “really provides a mechanism for these junior mining companies to finance their exploration and development,” said Adria Leung Lim, a partner at Toronto-based Aird & Berlis, who helps mineral firms set up such structures; they’re also available to oil and gas, pipeline and power-generation businesses. The federal government projects flowthrough share deductions will cost it $110 million in reduced tax revenue in 2021, down from $420 million in 2006.
In submissions last year to the House of Commons finance committee’s prebudget consultations, some cleantech firms and organizations recommended the provisions be extended to the sector.
Montreal-headquartered Enerkem noted that “scaling-up transformative cleantech innovation is similar to exploration risks” in mining, oil and gas, and “the activities are similarly capital-intensive,” making the industry a good candidate for flow-through shares. The company’s technology converts waste into fuel and chemicals. “We’re building it for it to make money in the long term, obviously,” said Philippe Cantin, vice-president of corporate finance and investor relations. Until then, he said, the ability to sell flow-through shares would allow firms like his to turn early losses into an “additional pool of capital.”
Enerkem has raised more than $850 million in equity and senior debt issues from investors and strategic partners including provincial agency Investissement Québec, VC firm Cycle Capital Management and asset manager Blackrock.
“If you’re more industrial, there’s a lot of losses in the beginning years,” said Cantin. “(Financial) benefits will come much later down the line, (but) capital is needed from the start.” The 230-person firm has scaled up its recycling solution from pilot to demonstration to commercial operations. In December 2020, Enerkem announced it would build an $875-million biofuel facility in Varennes, Que. backed by energy giants Shell, Suncor and Proman and with funding from the provincial and federal governments.
Foresight, a Port Coquitlam, B.c.-based accelerator, proposed adding the “development and deployment of emissions-reducing technologies” to the list of qualifying businesses. Ottawa is already “very comfortable” with flow-through shares, so the change would be easier to implement than an entirely new program, said CEO Jeanette Jackson. “How symbolic would it be if (the government) took a mechanism currently used in the resource sector and applied it to cleantech?” The Canadacleantech Alliance — an umbrella group for startup-support organizations including Foresight, Toronto’s MARS and Halifax-based Innovacorp — called for a similar rule change to “unlock private capital investment” in the sector.
Finance Canada did not directly answer questions from The Logic about whether the government is considering extending flowthrough share provisions to emissions-reducing technologies.
Research suggests flowthrough shares don’t always generate sustained economic results. “The return to the investors, even net of taxes, is not very attractive,” said Vijay Jog, an emeritus professor at Carleton University’s Sprott School of Business; in a 2016 study, he found buyers of the equities from small mining issuers made an absolute loss of nearly 100 per cent. That implies the firms did not succeed in generating new revenue streams with the financing they raised, Jog said. “Nothing happens to the share price, so obviously nothing (resulted from) the exploration.”
Private investment in Canadian cleantech is a long-standing challenge. In September 2018, Ottawa’s advisory Economic Strategy Table reported the sector was being held back by a lack of growth capital. Last year, federal officials expressed concern internally about COVID-19’S effect on cleantech firms. The pandemic created the risk of an “extinction-level event,” warned a deck prepared by Natural Resources Canada’s low-carbon energy sector for a deputy ministers’ briefing in April 2020. It cited “decreased access to private sector debt and equity capital,” leading to “severe liquidity issues.”
Pre-pandemic, VCS had only just resumed funding cleantech companies “after years of market reluctance,” noted an August memo prepared for Natural Resources Minister Seamus O’regan, stating that “some investors have withdrawn from planned investments because of the uncertainty” of the pandemic. The Logic obtained the documents via access-to-information requests.
But both Cantin and Jackson say the pandemic hasn’t caused lasting damage to Canadian cleantech firms’ ability to access financing — quite the opposite. Globally, there’s now “more emphasis on the importance of pushing environmental projects (and the) decarbonization of our planet,” Cantin said, citing electric-vehicle firms listing via special-purpose acquisition companies and institutional investors launching new ESG funds.
Jackson noted that the flow-through shares proposal is just one way the government can help cleantech firms get financed. In December 2020, the federal government pre-empted one of Foresight’s recommendations, announcing a new $3-billion stream within its Strategic Innovation Fund to back projects that help reduce industrial emissions and develop the battery supply chain. It’s also giving commercialization agency Sustainable Development Technology Canada an additional $750 million over five years.
Even all that extra public and private money is “the tip of the iceberg, in terms of what will be required” for “Canada to transition to a green economy,” Jackson said.
A MECHANISM FOR THESE JUNIOR MINING COMPANIES TO FINANCE THEIR EXPLORATION.