Finance pushes ahead with relief for flow-through share issuers

Finance pushes ahead with relief for share issuers

New draft legislation extends certain timelines for junior mining exploration companies and other flow-through share issuers

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Finance recently published draft legislation to temporarily give eligible junior mining exploration companies and other flow-through issuers an additional 12 months to spend the capital they raise via flow-through shares. The draft legislation gives these eligible companies 36 months (up from 24 months) to incur eligible flow-through share expenses, under the general rule. This extension applies to flow-through share agreements that an eligible company entered into after February 2018 and before 2021. The draft legislation also provides flow-through share issuers an additional 12 months to incur eligible renounced expenses under the look-back rule, for agreements entered into in 2019 or 2020.

The legislation also provides 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".

Background

Finance first announced its intention to make these changes in July 2020, in response to the COVID-19 pandemic. The draft legislation reflects Finance's previous announcement, and includes consequential changes to reporting requirements to reflect the temporary extensions.

Extensions for incurring eligible expenses

Under the draft legislation, the 12-month extension to spend capital raised via flow-through shares would apply to agreements entered into on or after March 1, 2018 and before 2021, when using the general rule. In addition, the 12-month extension would apply to agreements that an eligible company entered into in 2019 or 2020, when using the look-back rule.

Under the general rule for renouncing Canadian exploration expenses, the issuing corporation must incur the eligible expenses during a certain period. This period begins on the date the corporation entered into the flow-through share agreement and ends 24 months after the end of the month the corporation entered into the agreement. 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. The draft legislation extends this 24-month period to 36 months for agreements entered into after February 2018 and before 2021.

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. However, the flow-through share issuer commits to incurring the eligible Canadian exploration expenses in the calendar year that immediately follows the year the issuer entered into the flow-through share agreement. The draft legislation provides an additional 12 months for the flow-through share issuer to incur the renounced expenses, for agreements entered into in 2019 or 2020.

Tax relief

The draft legislation proposes to provide flow-through share issuers up to an additional 12 months to incur expenses renounced under the look-back rule, before Part XII.6 tax applies.

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. The tax 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.

Under the draft legislation, relief from this tax will be provided by deeming expenditures incurred in 2020 to have been incurred in January 2020 (where the agreement was entered into in 2019). Similarly, expenditures incurred in 2021 will be deemed to have been incurred in January 2021 (where the agreement was entered into in 2020). In any other case, the expenditures will be deemed to have been incurred 12 months earlier. This relief would apply to agreements that the company entered into in 2019 or 2020.

If amounts are not actually expended by the end of 2021 (for agreements entered into in 2019) or 2022 (for agreements entered into in 2020), the additional 10% tax would apply to the amount of renounced expenditures, and investors may face adjustments to their taxes payable.

For more information, contact your KPMG advisor.

Information is current to December 22, 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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