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.