Legislative Amendments in Response to COVID-19 for Flow-Through Shares Obligations in the Canadian Mining Sector
On November 10, 2020, “Canadian Mining Sector Amidst COVID-19” discussed the use of flow-through shares (“FTSs”) generally in the Canadian mining sector. It also highlighted some of the effects that the COVID-19 pandemic has had on the Canadian mining industry, as Canadian resource issuers attempt to satisfy their qualifying expenditure obligations as required by the Income Tax Act (Canada) (“ITA”). In July 2020, the Department of Finance Canada announced that it intended to assist Canadian corporations which have issued FTSs by extending certain timelines for incurring eligible expenses under the ITA.
The Recently Published Draft Legislation
The anticipated draft legislation was released by the Department of Finance on December 16, 2020. Under normal circumstances, the two statutory timelines, those being the “General Rule” and the “Look Back Rule” (as discussed here), for resource companies to satisfy their obligations relating to FTSs under the ITA are typically achievable for junior resource companies. However, the COVID-19 pandemic has substantially decreased, and in some cases halted, exploration and development for most junior resource companies. This has ultimately resulted in little, if any, progress being made to meet such companies’ qualifying expenditures within the statutory timelines prescribed by the ITA. In response to an anticipated market-wide inability of junior resource companies to meet their expenditure obligations, the Department of Finance has proposed two extensions to the statutory periods under the General Rule and the Look Back Rule.
Statutory Extension: The General Rule
To meet a resource company’s FTSs obligation under the General Rule, qualifying expenditures must be incurred within 24 months after the end of the month in which the subscription agreement relating to the FTSs (the “FTS Agreement”) are entered into. Under the proposed amendments, the timeline to meet those obligations will be extended to 36 months after the end of the month in which the FTS Agreements are entered into. This extension is applicable to FTS Agreements entered into after February 2018, but before January 1, 2021.
Statutory Extension: The Look Back Rule
The Look Back Rule allows resource companies issuing FTSs to renounce certain expenditures in the year the FTS Agreement is made, even though such expenses may not yet have been incurred. However, only certain expenditures are eligible for this type of treatment (as discussed here). Under the existing Look Back Rule, resource companies have until December 31 of the calendar year following the year in which the FTS Agreement was made to meet these expenditure obligations.
The legislative amendments now call for a 12-month extension for the timelines imposed by the Look Back Rule. This means that resource companies will now have a total of 24 months following the end of the calendar year in which the FTS Agreement was made to incur their expenditures. This extension is applicable to FTS Agreements entered into during 2019 and 2020.
What Do These Amendments Mean for Resource Companies?
Resource companies may breathe a temporary sigh of relief knowing that they have more time (12 months extra under both the General Rule and the Look Back Rule) to meet their respective FTSs obligations. These amendments may also bolster confidence within the Canadian market and with investors looking to use FTSs investments for tax benefits. However, despite the reprieve, depending on how long the COVID-19 pandemic ensues, the amendments may still potentially fall short in providing the same flexibility that resource companies once knew in preserving and expending cash during more stable economic times. It will be difficult to tell how effective these legislative amendments will be while resource companies further navigate the uncertainties posed by the COVID-19 pandemic throughout 2021.
The Mines & Minerals Group at Aird & Berlis can advise on all aspects of a mining company’s activities, including mining disclosure standards, tax planning, technical reports and recruitment of qualified persons. For more information, please visit our Mines & Minerals webpage.