Canada: Proposed extended deadlines for “junior” mining exploration companies, other flow-through share issuers
Canada: Proposed extended deadlines for “junior” mining
Canada’s Department of Finance recently published draft legislation that would 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 would provide:
- Eligible companies 36 months (up from 24 months) to incur eligible flow-through share expenses, under the general rule. This extension would apply to flow-through share agreements that an eligible company entered into after February 2018 and before 2021.
- 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.
- 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 first announced its intention to make these changes in July 2020, in response to the coronavirus (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 1 March 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 would have to incur the eligible expenses during a certain period. This period would begin on the date the corporation entered into the flow-through share agreement and would end 24 months after the end of the month the corporation entered into the agreement. The issuing corporation could 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 would extend 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 could 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 would commit 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 would provide an additional 12 months for the flow-through share issuer to incur the renounced expenses, for agreements entered into in 2019 or 2020.
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 when 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 would be provided by deeming expenditures incurred in 2020 to have been incurred in January 2020 (when the agreement was entered into in 2019). Similarly, expenditures incurred in 2021 would be deemed to have been incurred in January 2021 (when the agreement was entered into in 2020). In any other case, the expenditures would 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 could face adjustments to their taxes payable.
Read a December 2020 report prepared by the KPMG member firm in Canada
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