Proposed Relief for Flow-Through Share Issuers: The Government of Canada Extends Spending Timelines by Twelve Months

Friday, August 14, 2020

Read online or download the full update here.

Keeping up with the current trend of COVID-19 relief programs, on July 10, 2020, the Government of Canada proposed a new relief measure (the “Proposed Relief”) for junior mining exploration and other flow-through share issuers (“Issuers”). The Proposed Relief will extend by twelve months the timelines during which Issuers must spend the capital raised through the issuance of flow-through shares on eligible flow-through expenditures that are to be renounced to the subscribers of the flow-through shares.

The Current Expenditure Timelines

Generally, Issuers finance their exploration expenditures through the issuance of flow-through shares to investors. In turn, Issuers incur certain eligible expenditures and renounce such expenditures in favour of the investors, which expenditures then become deductible in the hands of such investors. Under the current rules, Issuers may incur and renounce expenditures using either the “general rule” or the “look-back rule”.

The General Rule

Under the “general rule”, the Issuer must incur eligible expenditures during the period that begins on the day on which the flow-through share agreement is entered into and ends 24-months after the end of the month in which the agreement was reached. After the expenditures have been incurred, the Issuer can renounce these expenditures to the investor before March of the first calendar year that begins after the 24-month period.

The Look-Back Rule

Under the “look-back rule”, the Issuer can renounce eligible expenditures effective December 31 of the year in which the flow-through share agreement is entered into with the subscriber. While the Issuer may have yet to incur the renounced expenditures, the Issuer must commit to incur such expenditures in the calendar year immediately following the year in which the flow-through share agreement was entered into with the subscriber. Issuers who have renounced expenditures but have not incurred them before the end of each month (other than January) in the year following the year in which the flow-through share agreement is entered into may be subject to tax pursuant to Part XII.6 of the Income Tax Act (Canada) (the “Act”) to effectively compensate the Government of Canada for the accelerated deduction. An additional 10% tax is also imposed on the Issuer under Part XII.6 of the Act if the amounts renounced are not incurred by the end of the calendar year immediately following the year in which the parties entered into the flow-through share agreement.

The Proposed Relief to Expenditure Timelines

While the Proposed Relief has yet to be introduced into legislation, the relief measure proposed by the Government of Canada on July 10, 2020 contemplates that:

1. The Proposed Relief is expected to apply to both the “general rule” and the “look-back rule.”

2. Under the “general rule”, the Proposed Relief will apply to flow-through share agreements entered into after March 1, 2018 and before 2021. For example:

	Current Legislation	Proposed Relief
Date of Agreement	Incur Expense	Incur Expense
December 31, 2019	December 31, 2021	December 31, 2022
February 29, 2020	February 28, 2022	February 28, 2023
March 1, 2020	March 31, 2022	March 31, 2023
December 31, 2020	December 31, 2022	December 31, 2023

3. Under the “look-back rule”, the Proposed Relief will apply to flow-through share agreements entered into in 2019 or 2020.

	Current Legislation	Proposed Relief
Agreement	Incur Expense	Incur Expense
2019 Calendar Year	December 31, 2020	December 31, 2021
2020 Calendar Year	December 31, 2021	December 31, 2022

4. The tax under Part XII.6 of the Act will apply as if the expenditures incurred by the Issuer were incurred a year earlier than actually incurred.

5. The additional 10% tax under Part XII.6 of the Act would apply if amounts renounced by an Issuer to an investor are not actually expended by the Issuer by the end of 2021 (for flow-through share agreements entered into in 2019) or 2022 (for flow-through share agreements entered into in 2020) and the tax payable by any investor would need to be adjusted accordingly.  

Conclusion

If passed into law, the Proposed Relief will certainly provide some much-needed breathing room to Issuers that have had their exploration activities adversely affected by the COVID-19 pandemic.

If you have any questions with respect to the matters discussed above, please contact John Kutkevicius ([email protected]), Marija Tasevska ([email protected]), or any other member of our Tax practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.