New proposals to aid flow-through share issuers and junior mining exploration companies
Junior mining exploration companies and other flow-through share issuers will have an additional 12 months to spend capital they raise via flow-through shares, according to a recent announcement by Finance on July 10, 2020. Specifically, Finance is proposing to extend the period that junior mining exploration companies and other issuers can incur eligible flow-through share expenses, given the challenges faced by many of these companies as a result of COVID-19. Finance is also proposing to provide some relief for Part XII.6 tax, which generally applies to eligible Canadian exploration expenses that are renounced before they are incurred under the "look-back rule". Finance is proposing to temporarily provide relief by treating these expenditures as if they were incurred up to one year earlier than the date they are actually incurred, depending on the date the flow-through share agreement was entered into.
Finance notes that legislative amendments to implement these proposals will be released in due course.
General rule — Applicable dates
The 12-month extension would apply to agreements entered into on or after March 1, 2018 and before 2021, when using the general rule.
Under the general rule for renouncing Canadian exploration expenses, the issuing corporation must incur eligible expenses during the period that begins on the date the flow-through share agreement is entered into and ends 24 months after the end of the month in which the agreement is entered into. The issuing corporation can renounce the expenses to the investor after the expenses have been incurred and before March of the first calendar year that begins after the 24-month period.
Look-back rule — Applicable dates
The 12-month extension would apply to agreements entered into in 2019 or 2020, when using the look-back rule.
Under the look-back rule, a flow-through share issuer can enter into a flow-through share agreement with an investor in a calendar year and renounce eligible Canadian exploration expenses effective December 31 of that year, despite not having yet incurred the expenditure at the time of renunciation. The flow-through share issuer does, however, commit to incur the eligible Canadian exploration expenses in the calendar year that immediately follows the one in which the flow-through share agreement is entered into.
Finance also proposes to apply Part XII.6 tax as if expenditures were incurred up to one year earlier than the date they were actually incurred.
Part XII.6 tax applies where a corporation renounces Canadian exploration expenses using the look-back rule. The tax is generally calculated for each month (except January) beginning in the calendar year following the year in which the flow-through share agreement is entered into, and is calculated based on the amount of renounced expenditures that have not been expended by the end of that month. An additional 10% tax applies to the amount of renounced expenditures not spent at the end of that calendar year, and investors may face adjustments to their taxes payable.
The proposals effectively provide an additional 12 months to incur the renounced expenditures. Under the proposals, if amounts are not actually expended by the end of 2021 (where the agreement was entered into in 2019) or 2022 (where the agreement was entered into in 2020), the additional 10% tax under Part XII.6 would apply and the tax payable of investors would be adjusted accordingly.
The relief in respect of Part XII.6 tax would apply to agreements entered into in 2019 or 2020.
For more information, contact your KPMG advisor.
Information is current to July 14, 2020. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500
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