No legislation for Flow-Through Funds Expenditure Extension? What’s an Issuer to Do?
December 14, 2020 – It’s now been five months since the federal government announced a proposal to extend the timelines for spending the capital raised via flow-through shares by 12 months. Companies that issued flow-through shares in 2019 relying on the look-back rule are coming up to the deadline (Dec. 31, 2020) by which they are required to have spent all of the funds raised. Absent the proposed relief, these companies are subject to a penalty of 10% of the unspent funds, and become liable for the amount of tax that flow-through share subscribers would be subject to pay upon reassessment by CRA.
Flow-through share issuers have a lot of questions as they head into year end. Am I obliged to file revised forms with CRA reducing the amount of Canadian Exploration Expense (CEE) renounced in 2019 if any of the funds raised remain unspent? Do I have to send revised tax slips (T101s) to flow-through shares subscribers? How is this contingent liability reflected in my year end financial statements? Is there any other disclosure I’m obliged to make?
Unfortunately, as at the date of publication of this article, there are no clear answers. Typically when the Department of Finance announces proposed fiscal measures, the announcement is accompanied by or followed shortly thereafter with draft legislation, or at the very least, a statement from CRA that they will be taking an administrative position consistent with the announcement by Finance. This latter approach has been taken by CRA this year on a number of occasions when emergency COVID relief measures were announced by Finance such as extended filing dates for tax returns.
We do know that Finance and NRCan have been consistent in their message that it is the government’s intention to follow through with legislation implementing the July proposals. No steps would be required to be taken by issuers of flow through shares until deadlines for tax filings and financial disclosure which start at the end of February 2021. While we may not see draft legislation in time, we do expect the type of guidance from CRA that can be relied upon by issuers and their auditors who have to get busy very soon on 2020 year end reporting.
On November 6, 2020, the Quebec Department of Finance issued an information bulletin which confirmed they will be harmonizing the Quebec flow-through legislation to be consistent with the amendments proposed by the federal government. Adoption of the amendments to the Québec Taxation Act would only follow the implementation of the proposed changes to the federal tax legislation. The amendments to the Quebec Taxation Act would be applicable to agreements concluded between March 1, 2018 and prior to 2021 under the general rule, and applicable to agreements concluded in 2019 or 2020 under the look-back rule.
A Word of Caution to Issuers of Flow-Through Shares
On July 10, 2020, the Canadian government announced proposals intended to provide some relief to the impact of the COVID-19 pandemic for junior mining companies who raise equity by issuing flow-through shares. The normal rules governing flow-through share offerings prescribe strict timelines for spending the capital raised via flow-through shares. In general, the capital must be fully expended within 12 to 24 months of when the funds were raised. The announcement states that for a limited period the Government proposes to extend the time to incur eligible flow-through share expenses by 12 months. More details of the proposals can be found in the Finance Backgrounder.
Many mineral exploration and development companies understandably are interpreting the proposals very broadly, and are preparing current budgets on the assumption that they have extra time to spend their flow-through dollars. However, we suggest a cautious approach be taken.
The news release issued by the Department of Finance in July was premised on offering support to “junior exploration and other flow-through share issuers”. Most flow-through shares are issued to finance exploration expenses – those expenses that fit within the definition of Canadian Exploration Expenses (CEE), but flow-through shares may also be issued to fund certain development expenses – those expenses that fit within the definition of Canadian Development Expenses (CDE). The Backgrounder put out by Finance with its news release refers only to CEE. If the proposals are being introduced with a view to providing relief to companies affected by restrictions or shutdowns resulting from measures to combat the spread of COVID-19, it would be reasonable to expect that companies that have or plan to issue flow-through shares to fund CDE should benefit from this relief. However, the publications from Finance to date are ambiguous.
Furthermore, the prevailing view seems to be that no conditions will be attached to the extension. The Backgrounder states that “junior mining companies and other flow through share issuers whose operations have been impacted by COVID-19 would be allowed additional time to incur eligible expenses”. Whether the legislation giving effect to the proposals requires that the companies seeking to rely on the relief will have to demonstrate that they were directly impacted is not clear.
As far as we know, the Government has not signaled anything that would indicate a restrictive approach to the measures to provide the announced relief. Presumably, the announcement included messaging around the impacts of the pandemic since it is part of the Government’s response to COVID related issues. However, the rules governing the flow-through share regime are nuanced and the draft legislation to implement the proposals has not been published.
Surprisingly in the mining friendly jurisdiction of Quebec, there has been complete silence from the provincial government as to whether it intends to follow the lead of its federal counterpart. Until we get clarity on the position of the Quebec government on this matter, flow-through share investors funding exploration in the only provincial jurisdiction in Canada that has a separately administered income tax system, should be sure that budgets factor in any possible delay or other impacts of COVID-19 through to the end of 2021.
Regardless of any proposed legislation, from both an investor’s and an issuer’s point of view, it is in the best interest of a mineral exploration company to spend its capital quickly (and prudently) to create shareholder value. Even patient investors who understand the long timelines of the mining industry may not want to take on the risk associated with executing on an exploration program budgeted over up to three years, rather than up to two.
This article was orginally published on the PearTree Perspective.
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