Canadian Exploration Expense

Are Canadians paying oil & gas companies to explore? It’s worse than that.

The Canadian Exploration Expense tax dodge is so perverse that it actually encourages investments which result in drilling and diggging wilderness for no other purpose than to create the loss that will flow through to investors, in the form of a tax credit.

This tax scheme (If it weren’t legal, I’d call it a scam) caught our interest recently when Hillsborough Resources announced that the company “has struck a deal to raise $6.6 million in a private financing”. Hillsborough is one of the companies we watch because of its interest in coal – mining it, generating power burning it, extracting coalbed methane from it (More about Hillsborough below.)

The company claims that it will use the money “to incur eligible Canadian Exploration Expenses” (CEE).

How does this tax work?

The Canadian Exploration Expense (CEE) is part of a suite of tax dodges which follow through the exploration-production-wrapup life-cycle of a mine or oil or gas project.

Follow this closely:

– the Canadian Exploration Expense (CEE) is a 100% deduction from income for eligible mining and oil and gas exploration expenses.

– a company will define an exploratory drilling program and issue “flow-through” shares which it will then sell to investors

– each share will have attached to it a tax credit

– the investor can use 100% of that tax credit as a deduction from income

– the credit can be carried forward from year to year

– the share value can actually decline significantly and the investor still nets out with a profit from the investment because of the value of the tax credit

Canada’s lands and resources, First Nations and rural communities, are under seige enough. Tax dodges like the CEE encourage wanton irresponsible intrusions into wilderness areas, often for no other purpose than to make rich investors richer.

Hillsborough Resources:

– owns the Quinsam coal mine in Campbell River

– failed to promote a “mine-mouth” coal-fired generation project to BC Hydro

has a deal with gov’t of BC to develop coalbed methane on its coal properties

– has a joint venture with Texas Canadian Ventures to develop coalbed methane (TCV vice-president Gilbert Dozier from Lousiana was once convicted for extortion and racketeering, and is also associated with Peace River Corp which has coalbed methane interests near Hudson’s Hope in northeast BC).

– earlier in 2004 acquired the Bingay Creek coal property in the Elk Valley (southeast BC) at which the company intends to open a small mine in 2005.

– in 2004 acquired the Cumberland Coal mine in Tennessee, which Hillsborough intends to convert from an open pit operation to an underground mine

Like all the small coal operations in BC, the company’s share trading has been strong recently – a response to rising coal prices globally.

Hillsborough Resources shares halted,
company strikes $6.6M private financing deal

TORONTO, Dec 10, 2004 (The Canadian Press via COMTEX) —

Coal miner Hillsborough Resources Ltd. has struck a deal to raise $6.6 million in a private financing.

The company (TSX:HLB) said Friday it will issue five million shares at 90 cents each and two million flow-through shares at $1.05 each to raise $6.6 million.

The money will be used for general corporate purposes.

Hillsborough’s shares were halted Friday pending news of the financing. They last traded at $1.00, up three cents.

Hillsborough manages and owns the Quinsam Coal Corp. near Campbell River, B.C., on Vancouver Island. The company generated revenues of nearly $13.7 million last year and employed 50 people at the end of 2003.

Copyright (C) 2004 The Canadian Press (CP), All rights reserved

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