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The Tax Treatment of Non-Renewable Resource Exploration Expenditures in Canada: A Historical Review and a Way Forward


  • Tedds, Lindsay M.


The Canadian Income Tax Act recognizes three main types of expenses incurred in Canada by firms principally engaged in mineral, metal, petroleum, and natural gas. These are Canadian Exploration Expenses (CEEs), Canadian Development Expenses (CDEs), and Canadian Oil and Gas Property Expenses (COPGE). The Income Tax Act permits these expenses to be deductible from income for tax purposes to varying degrees of generosity. CEEs are 100% deductible from income while CDEs and CPOGEs are generally deductible at a declining balance rate of 30% or 10% per year respectively., Canada’s new federal government has proposed to change the deductibility of CEEs, a change that potentially has wide-reaching implications for Canada’s energy and resources sector. In particular, the government has committed to phasing out subsidies for the fossil fuel industry, the first step of which is to only allow the use of the CEE deduction for unsuccessful exploration. The Liberal proposal raises important considerations about the tax treatment of exploration expenses. First, what is the background of and justification for the current tax treatment of these expenses? Second, in what way could the CEE expense be considered a subsidy? Third, what are some of the real implications of the proposal? To analyze this issue, I first lay out the history regarding the tax deductibility of resource expenses in Canada, detailing how the existing tax treatment can be considered preferential. The preferential tax treatment for exploration and development expenses then laid the ground work for the flow-through share regime, which flows the deduction through to investor’s in exchange for equity investment. The second section details the history of the flow-through share regime, showing how the FTS regime is not only based on a tax preference but also is itself preferential tax treatment. The third section lays out the justifications for the tax preferences for both exploration and development expenses and the FTS regime. The paper then addresses the evidence for the justifications for the preferential tax treatments. Finally, the paper considers the outstanding questions from the Liberal proposal as well as the implications the proposal has. Poignantly, the proposal as it stands will lead to the demise of the FTS regime and the implications of this will need to be addressed by the government if it proceeds with its proposal. The paper ends with some concluding remarks.

Suggested Citation

  • Tedds, Lindsay M., 2017. "The Tax Treatment of Non-Renewable Resource Exploration Expenditures in Canada: A Historical Review and a Way Forward," MPRA Paper 96912, University Library of Munich, Germany, revised 17 Dec 2017.
  • Handle: RePEc:pra:mprapa:96912

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    References listed on IDEAS

    1. Glenn Jenkins, 1990. "Tax Shelter Finance: How Efficient Is It?," Development Discussion Papers 1990-02, JDI Executive Programs.
    2. Vijay Jog, 2016. "Rates of Return on Flow-Through Shares: Investors and Governments Beware," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 9(4), February.
    3. Kenneth J. McKenzie & Jack M. Mintz, 2011. "The Tricky Art of Measuring Fossil Fuel Subsidies: A Critique of Existing Studies," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 4(14), September.
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    More about this item


    Canadian Exploration Expenses; Canadian Development Expenses; Flow-through shares; tax deductibility; non-renewable resources expenses;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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