Under tax legislation governing flow-through shares, eligible Canadian exploration expenditures have been 100% deductible from income from any source for at least three decades. These deductions effectively reduce before-tax income. Tax Credits apply directly to reduce taxes payable.
A Non-Refundable Tax Credit reduces taxes to the extent of taxes payable.
A Refundable Tax Credit reduces taxes payable and then, if there is an excess, results in a cash refund.
The Federal Tax Credit is non-refundable (the taxpayer has to pay the taxes in order to use the claim). However, it can be carried back and applied against taxes paid in the previous three years. Unused tax credits may also be carried forward for a period of ten years.
Tax Credits are considered “assistance” for income tax purposes, reducing the CEE pool for investors. Accordingly, while taxpayers can deduct the full amount of renounced expenses in the year incurred, and claim the credits in that same year, the tax credits claimed reduce their CEE pool in the following year. If a “negative” CEE pool arises in that following year; the investor must report an income inclusion. Also, claims to the BC Tax Credit reduce the 15% Federal Tax Credit.