Navigating the New Divide Between CEE and the BC METC

Prepared by McGovern Hurley LLP
February 18, 2025

Background

Both the federal Canadian Exploration Expense (CEE) regime under the Income Tax Act and the British Columbia Mining Exploration Tax Credit (BC METC) require that qualifying expenditures be incurred for the purpose of determining the existence, location, extent, or quality of a mineral resource.

While the concepts of existence, location, and extent are generally well understood, the meaning of “quality” has been the subject of ongoing debate. In particular, uncertainty has existed as to whether studies focused on economic viability or engineering feasibility fall within this purpose test.

A recent decision of the British Columbia Supreme Court has provided important clarification at the provincial level, while subsequent federal legislative amendments have moved in the opposite direction.

Seabridge Gold Inc. v. British Columbia (2025 BCSC 558)

Overview of the Case

In Seabridge Gold Inc. v. British Columbia, the Court considered whether various expenditures incurred during the prefeasibility stage of a mining project qualified as exploration expenses for purposes of the BC METC. The taxpayer, Seabridge Gold Inc., incurred significant costs related to engineering, geotechnical, metallurgical, and infrastructure studies.

The British Columbia Ministry of Finance denied the company’s BC METC claims on the basis that these expenditures related to economic viability and feasibility, rather than to the physical characteristics of the mineral resource.

Court’s Analysis

The Court adopted a broad and purposive interpretation of the term “quality” within the statutory purpose test. It concluded that, in the mining context, the quality of a mineral resource cannot be assessed solely by reference to physical attributes such as grade or concentration. Instead, quality necessarily includes factors that determine whether the resource can be mined in a practical and economic manner.

The Court held that considerations such as operating and capital costs, accessibility, geotechnical conditions, metallurgical performance, environmental constraints, and infrastructure requirements are all relevant to assessing a deposit’s quality. A mineral deposit that cannot be economically or practically mined, regardless of its physical characteristics, has limited real-world value.

Outcome

The Court determined that a broad range of prefeasibility and feasibility-related expenditures may qualify for the BC METC, provided they are incurred for the purpose of evaluating the resource and are not directly related to the preparation of a formal prefeasibility study report.

This decision significantly expanded the scope of expenditures eligible for the BC METC and, by extension, reflected a broader interpretation of the CEE purpose test as it existed prior to recent federal amendments.

Federal Budget 2025: Narrowing of the CEE Purpose Test

Legislative Amendment

In response to the Seabridge decision, the federal government amended the Income Tax Act through Budget 2025 to clarify the meaning of “quality” for CEE purposes. The amendment provides that, for federal tax purposes, “quality” does not include expenditures incurred to determine the economic viability or engineering feasibility of a mineral resource.

This amendment applies to expenditures incurred on or after November 4, 2025.

Practical Effect

As a result of the amendment, federal CEE eligibility is now limited to expenditures that relate strictly to the physical characteristics of a mineral resource. Examples include geological, geophysical, geochemical, and drilling activities that are directed at identifying grade, concentration, and other physical attributes.

Expenditures incurred to assess whether a resource can be mined profitably, or to determine optimal engineering or design solutions, are excluded from CEE treatment for federal purposes after Budget Day.

Federal–Provincial Mismatch

Current Divergence

There is now a clear divergence between federal and British Columbia tax treatment of exploration expenditures:

• The Seabridge decision remains binding in British Columbia. As a result, the BC METC continues to permit a broader range of expenditures, including many economic and feasibility-related studies, subject to the limitations identified by the Court.
• At the federal level, CEE claims for expenditures incurred on or after November 4, 2025 are restricted to activities relating solely to physical characteristics of the mineral resource.

Implications for Taxpayers

This mismatch creates several practical challenges:

• A single expenditure may qualify for the BC METC but not for federal CEE.
• Considerations surrounding flow-through eligible expenditures that may be renounced under a flow-through share agreement.
• Federal and provincial tax outcomes may differ materially for the same exploration program.
• The risk of compliance errors and audit disputes increases where costs are not clearly categorized and documented.

Key Takeaways for Clients

• Careful cost tracking: Exploration expenditures should be carefully reviewed and categorized based on their purpose, distinguishing physical exploration activities from economic or engineering feasibility work.
• Robust documentation: Detailed records should be maintained to substantiate the purpose and nature of each expenditure, including reports, contracts, and technical descriptions.
• Timing matters: Expenditures incurred prior to November 4, 2025 may still benefit from the broader interpretation of the CEE purpose test. Expenditures incurred on or after that date are subject to the narrower federal rules.
• Monitor provincial developments: British Columbia may amend its legislation or issue administrative guidance to align the BC METC with the federal approach. Taxpayers should monitor for further developments.
• Seek professional advice: Given the increased complexity and divergence between regimes, professional tax advice is strongly recommended when preparing CEE and BC METC claims.

Conclusion

The Seabridge Gold Inc. decision marked a significant expansion of eligible exploration expenditures under the BC METC by confirming that “quality” includes economic and feasibility considerations. However, the federal government has now legislatively restricted the scope of CEE to exclude such expenditures for costs incurred after November 4, 2025.

Until further legislative or administrative alignment occurs, mining companies operating in British Columbia must navigate a period of federal–provincial mismatch. Careful planning, documentation, and professional guidance will be essential to managing compliance risk and optimizing available tax incentives.