Investment funds

As part of the Quebec budget for 2025, the provincial government has announced a host of new tax measures and changes to existing tax measures. This series of bulletins will provide an overview of three of these measures which introduce significant tax changes and will have a considerable impact on many Quebec businesses: the introduction of the CRIC, changes to the tax credit for the development of e-business (TCEB) and changes to the public utility tax (PUT). Research and development tax credits, such as the R&D tax credit for salaries and wages, the university research tax credit and the pre-competitive research tax credit, all have a very important place in Quebec’s tax and economic systems. They were designed to provide substantial tax support for businesses investing in research and development (R&D), while reducing the financial risks inherent to such activities. The new CRIC simplifies and centralizes these tax measures by grouping them under a single tax credit, making application for Quebec businesses more consistent and efficient. This new credit’s basic rate will be 20%, with an increased rate of 30% applicable to the first million dollars of eligible expenses. This structure is designed to be internationally competitive and help Quebec businesses maintain a significant tax advantage over their counterparts in other jurisdictions. To benefit from the credit, a business must carry out R&D or commercialization activities in Quebec and incur eligible expenses in the course of these activities. Eligible expenses include salaries directly linked to research, payments to subcontractors and research organizations and certain capital expenditures, save for those made to acquire real estate property such as land, buildings and rights of use over buildings. The real estate exclusion is intended to ensure that tax support is spent on technological innovation rather than real estate investments. The credit takes effect for all tax years ending after March 25, 2025. The tax credits for scientific research and experimental development, university research or public research centres, private partnership pre-competitive research, fees and dues paid to a research consortium, technological adaptation services and industrial design are all abolished, as they are now included in the new CRIC.

On March 25 last, the Quebec Minister of Finance unveiled his 2025-2026 budget, which significantly transforms the tax landscape of the mining sector in Quebec. This budget introduces major changes to the flow-through share regime and to the tax credit relating to resources, which will have significant implications for investors and businesses in the natural resources sector. Changes to the flow-through share regime Abolition of both 10% additional deductions As part of the review of its tax expenditures, the government has decided to adjust the flow-through share regime. As a result, the following deductions have been abolished: the additional 10% deduction for certain exploration expenses incurred in Quebec by a mining corporation that does not exploit any mineral resources; the additional 10% deduction for certain surface mining exploration expenses incurred in Quebec by a mining corporation that does not exploit any mineral resources. With some exceptions1, these changes will apply to flow-through shares issued after March 25, 2025. It should also be noted that the budget abolishes the additional capital gains exemption resulting from the divestiture of certain resource-related properties, such as flow-through shares. On the other hand, the additional deduction for certain issuance costs seems to be maintained. Changes to the tax credit relating to resources Despite these abolitions, the budget does include some positive news for the critical and strategic metals sector. The budget provides for a temporary increase in the rates of the tax credit relating to resources for eligible expenses related to critical and strategic minerals. Until December 31, 2029, a 45% tax credit rate will apply to these costs for eligible corporations, that is, those that do not exploit any mineral resources, and 20% for other eligible corporations, that is, those that exploit mineral resources. For the purposes of the tax credit relating to resources, critical minerals will refer to the following minerals: antimony, bismuth, cadmium, cesium, copper, tin, gallium, indium, tellurium and zinc. Strategic minerals are defined as cobalt, rare earth elements, platinum group elements, graphite (natural), lithium, magnesium, nickel, niobium, scandium, tantalum, titanium and vanadium. Several other technical changes have also been made to the tax credit relating to resources. These will be the subject of a more detailed bulletin at a later date. The changes introduced by the 2025-2026 Quebec budget will certainly have an impact on the tax planning of enterprises and investors in the natural resources sector. Our team of mining law and tax professionals is ready to answer all your questions regarding these new measures. We can assist you in developing your mining investment projects in Quebec, maximizing the benefits of the enhanced rates of the tax credit relating to resources, as well as in implementing successful flow-through financing. These amendments will not apply to shares issued after March 25, 2025, but before January 1, 2026, provided that they are issued following an application for a preliminary prospectus receipt made no later than March 25, 2025. Nor will they apply to shares issued after March 25, 2025, if issued following a public announcement made no later than March 25, 2025, and if the report of distribution form is submitted to the Autorité des marchés financiers no later than May 31, 2025.

In a strategic move to bolster domestic production of critical minerals, President Donald Trump has invoked the Defense Production Act (DPA). He signed an executive order aiming to reduce U.S. dependence on foreign sources, particularly China, which dominates the global rare earth minerals market. This market dominance poses economic and security risks for countries reliant on these materials for advanced technologies, such as the U.S. and Canada. The executive order leverages the DPA to provide financing, loans, and investment support for domestic processing of rare earth elements (REEs) and critical rare earth elements (CREEs). REEs are profoundly valuable and are essential in the manufacture of electronics (e.g., microchips, semiconductors, and essentially any product with a computer chip).  This initiative seeks to enhance national security by ensuring a stable supply of materials essential for technologies ranging from batteries to defense systems. Standard NdFeB magnets, without terbium (Tb) or dysprosium (Dy), cannot be used in high-temperature applications such as in electric vehicles (EV) critical components.  The production of high-value pre-magnetic REE alloys, requires the purchase of separated Tb and Dy oxides from China. Recent concerns about future supplies of REEs have now narrowed chiefly to the heavy rare earth elements (HREEs). Essentially, all of the world's HREEs are currently sourced from the south China ion-adsorption clay deposits.  The ability of those deposits to maintain and increase production is uncertain, particularly in light of environmental degradation associated with some mining and extraction operations in the region. As the U.S. intensifies efforts to secure its mineral supply chains, Canada, rich in mineral resources, has an opportunity to strengthen its position as a key supplier. However, Canada must also navigate its own strategic interests, ensuring that domestic extraction and processing capabilities remain competitive. REE mineral deposits typically contain appreciable levels of radioactive elements such as thorium (Th) and uranium (U), making the extraction of REE values environmentally challenging.  Novel processes for the extraction and separation of REE values in high yield and purity, with an environmentally cleaner design and overcoming the technical and economic limitations of the existing commercial processes, are of commercial interest. Additionally, diversifying export markets beyond the U.S. could shield Canada from potential shifts in American policy while strengthening its role as a global player in the critical minerals industry. As the Trump administration’s directive underscores the strategic importance of CREEs and the necessity to develop resilient supply chains, we can expect more news in the upcoming months from the U.S. regarding its efforts to lessen its dependence on other countries in the mining industry. Stay tuned!

Quebec has set ambitious energy transition and industrial decarbonization targets. The shift to greener practices has to be taken in a context where our energy consumption could rapidly grow under the combined effect of a number of factors, such as the reindustrialization of our economy, population growth, transport electrification and the potential for artificial intelligence to consume vast amounts of energy. Investing in the development of energy infrastructure is therefore critically important, as an abundance of energy is key to economic prosperity. The problem is that public finances are already stretched to the limit with the need to renovate our aging infrastructure, among other things. Encouraging private equity investment is thus vital, and tax incentives can be very effective in this respect. The American example In 2022, the United States passed its Inflation Reduction Act (IRA), with the goal of stimulating investment in the renewable energy sector, in particular. More specifically, the IRA altered or created a number of tax credits to encourage private investment.1 Over the past two years, US businesses have announced a total of almost US$276 billion in new investments in clean energy generation and the capturing or elimination of carbon dioxide and other forms of industrial decarbonization, an increase of 34% on the two years previous.2 The IRA is effective in that it takes the respective situations of various energy sector stakeholders into account in a creative, flexible and pragmatic way, especially where taxation is involved. Energy project promoters often have to wait many years for their projects to generate income and profits, even though the banks and other investment funds they solicit financing from can be presumed to be operating profitable businesses. The tax losses that occur in the years during which such projects are designed and built are therefore of little interest to developers, but of immediate interest to investors. And so, a tax equity market has emerged, in which businesses subject to taxes can invest in the shares of entities set up to develop such projects so as to benefit from tax credits and faster depreciation. Typically, the entity that cashes in the investment and develops the project distributes 99% of income, losses and tax credits to investors until a predetermined return is achieved. Once that return is achieved, the investor’s share of the benefits decreases, and the developer has the option of buying out the investor’s residual share. The IRA has transformed how federal clean energy tax credits are monetized, and it is now possible to buy and sell such credits without having to make a long-term investment. For businesses, this new way of doing things is an additional and attractive way to participate in the growing tax credit market.3 In 2023, the volume of the tax equity market for American projects was around US$20 to 21 billion, up about US$18 billion from the previous year.4 It appears that the trend will continue. It is estimated that the value of the current market, which is particularly attractive to banks, is set to double to US$50 billion a year by 2025.5 The equivalent of flow-through shares The Quebec and Canadian tax deductions mechanism that most closely resembles the US tax equity market is probably flow-through shares. Through these, businesses in the mining and renewable energy sectors can transfer their mining exploration expenses and other expenses—specifically designated as eligible—to investors, who can then deduct them from their own taxable incomes.6 These businesses can thus issue shares at a higher price than they would receive for common shares to finance their exploration and development operations. Investors are willing to pay a higher price in return for the tax deductions afforded by the eligible expenses incurred by the issuing businesses, which can amount to a maximum of 120% of the equity invested in the shares.7 Investors can also claim a 15% or 30% federal tax credit. However, because tax incentives cannot be transferred, our mechanism is more rigid than the American one, and it can only be applied to mineral exploration and development expenses and certain specific expenditures related to renewable energy and energy conservation projects, such as electricity generation using renewable sources like wind, solar energy and geothermal energy.8 With ambition and innovation comes the need to take action Quebec could draw inspiration from the IRA to increase the attractiveness of flow-through shares and broaden their scope of application, thereby creating a new tool to finance the energy transition. The renewable energy sector is similar to the mining sector in many respects, not least in terms of the considerable amount of capital required to build the infrastructure needed to operate a mine or energy generation facility. The flow-through share mechanism, which is well-established and popular with investors,9 could be just as successful in our energy transition context. Making such incentives easier to transfer would also drive the emergence of a market similar to the US tax equity market. A number of Québec flagship companies, such as Hydro-Québec,10 Innergex11 and Boralex,12 are also very ambitious when it comes to developing large-scale energy projects. They face major financing challenges, as do those in the industrial decarbonization and infrastructure renewal sectors. Innovation is necessary to meet these challenges and make the transition to a more sustainable, but just as prosperous, world, and to do so in good time.13 Link Rhodium Group and MIT’s Center for Energy and Environmental Policy Research (CEEPR), Clean Investment Monitor, link Brandon Hill, How to take advantage of tax credit transferability though the Inflation Reduction Act, Thomson Reuters Institute, April 16, 2024, link Allison Good, Renewables project finance to keep pace in 2024, but tax equity rule looms, S&P Global, January 12, 2024, link Lesley Hunter and Mason Vliet, The Risk Profile of Renewable Energy Tax Equity Investments, American Council on Renewable Energy, December 2023, link Link, page in French only Link Link Prospectors & Developers Association of Canada, Flow-through shares & the mineral exploration tax credit explained, link Link Link Link The authors would like to acknowledge the participation and the work done by Sophie Poirier in this publication