Flow-through share spending timelines extended by 12 months

15 July 2020

On July 10, 2020, the Department of Finance Canada announced a proposal to extend the time that issuers of "flow-through shares" have to incur eligible expenditures by 12 months. This extension applies to issuers with operations that have been impacted by COVID-19 and should provide relief to mining companies that have had to change or halt their operations due to the pandemic.

Many mining companies issue "flow-through shares" to help finance their exploration and project development activities. "Flow-through shares" are shares issued by a principal-business corporation (the "Issuer") to a person (the "Investor") under an agreement in writing between the Investor and the Issuer under which the Issuer agrees to incur eligible exploration expenses within a certain period of time in an amount up to the consideration paid by the Investor for the issued shares. These expenses are then renounced by the Issuer to the Investor and are deductible by the Investor. If the Issuer does not incur the full amount of the expenses within the specified timelines and renounce the expenditures to the Investor as agreed, the Issuer will usually be liable to indemnify the Investor for any tax that the Investor has to pay as a result of the Issuer's failure to do so.

Normally, the Issuer has 24 months starting from the month after the agreement is made to incur the eligible exploration expenditures. However, most issuers try to structure their flow-through share transactions to take advantage of a special rule that shortens the time they have to incur expenses so that they can renounce expenses to their investors effective as of an earlier date. Issuers that utilize this "look-back rule" can renounce eligible exploration or development expenses to the Investor effective as of December 31 of the year of the agreement as long as the renunciation is made before the end of March, and the expenses are incurred before the end of December, of the following year. Depending on when the agreement is entered into, this may leave the Issuer with as little as 12 months to incur the expenses or be liable to pay out significant amounts under any indemnity obligations.

While the proposal by the Department of Finance Canada is intended to give Issuers a little more breathing room so that the decision of when to continue operations can be driven by safety and the well-being of employees and individuals in the communities in which these mining companies operate, it is unclear at this time whether the extended timelines will apply to Issuers that issued shares prior to the date of the announcement. Issuers will also need to consider the specific terms of the agreements they are bound by, including any termination dates.

The announcement from the Department of Finance Canada can be found here.


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