Supporting Jobs and Safe Operations of Junior Mining Companies

The Government is proposing to protect jobs and safe operations of junior mining exploration and other flow-through share issuers, by extending the timelines for spending the capital they raise via flow-through shares by 12 months.

Current Rules

There are two rules that describe the periods of time during which flow-through share issuers must incur and renounce eligible expenditures – the general rule, and the rule commonly referred to as the “look-back rule.”

• Under the general rule for renouncing Canadian exploration expense (CEE), the issuing corporation must incur eligible expenses during the period that begins on the date the flow-through share agreement is entered into and ends 24 months after the end of the month in which the agreement is entered into. 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.
• 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 CEE effective December 31 of that year, despite not having yet incurred the expenditure at the time of renunciation. The flow-through share issuer does, however, commit to incur the eligible CEE in the calendar year that immediately follows the one in which the flow-through share agreement is entered into.

Where a corporation renounces CEE using the look-back rule, it is subject to a special tax under Part XII.6 of the Income Tax Act in respect of each month (other than January) of the calendar year following the calendar year in which the agreement is entered into. The tax is based on amounts renounced as CEE that have not been expended before the end of that month.

In addition, if at the end of the calendar year following the calendar year in which the agreement was entered into, the flow-through share issuer has failed to incur CEE equal to the amount renounced, an additional tax of 10 per cent of the unspent CEE is payable by the flow-through share issuer. Moreover, in these circumstances, investors can face retroactive adjustments to their tax payable.

Proposed Changes

Today’s proposal, which would be followed by legislative amendments in due course, means 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. Specifically:

• The Government proposes to extend, by 12 months, the period to incur eligible flow-through share expenses under the general rule and the look-back rule.
• The Government also proposes to apply Part XII.6 tax as if expenditures were incurred up to one year earlier than the date they were actually incurred. If amounts are not actually expended by the end of 2021 (where the agreement was entered into in 2019) or 2022 (where the agreement was entered into in 2020), the additional 10 per cent tax under Part XII.6 would apply and the tax payable of investors would be adjusted accordingly.
• The 12-month extension would apply to agreements entered into on or after March 1, 2018 and before 2021, when using the general rule.
• The 12-month extension would apply to agreements entered into in 2019 or 2020, when using the look-back rule.
• The relief in respect of Part XII.6 tax would apply to agreements entered into in 2019 or 2020.