Resource companies that have issued flow-through shares shortly before or during the global COVID-19 pandemic may have faced difficulties, including the shutdown of mines, incurring eligible resource expenses within the normal timelines required under the Income Tax Act (Canada) (the “Tax Act”).
The Tax Act allows for the renunciation of certain eligible resource expenses (“Eligible Expenses”) incurred by a resource issuer to its investors. Until now, a resource issuer had to incur the Eligible Expenses within 24 months from the date it entered into a flow-through share subscription agreement (a “FT Agreement”) with an investor. Under the so-called “look-back” rule, the resource issuer may renounce to the investor, effective the end of the year in which the FT Agreement was entered into, Eligible Expenses incurred by the end of the following year, provided certain conditions are met. For example, for an FT Agreement entered into in 2020, Eligible Expenses incurred in 2021 may be renounced to the investor with an effective date of December 31, 2020. Where the look-back rule is used by a resource issuer, the issuer is required to pay tax under Part XII.6 of the Tax Act on Eligible Expenses that are renounced, but not yet incurred, starting in February of the second year.
In order to support and protect the mining sector during this challenging period, the Minister of Finance (the “Minister”) announced certain measures (the “July Proposals”) on July 10, 2020. Draft legislation (the “Draft Legislation”) implementing the July Proposals was released on December 16, 2020, but has not yet been passed into law. The Draft Legislation generally provides resource issuers a 12 month extension to incur Eligible Expenses. Specifically, for FT Agreements entered into:
- on or after March 2018 and before 2021, the 24 month period under the general rule to incur Eligible Expenses is extended to 36 months;
- in 2019 or 2020:
i. issuers will have an additional 12 months under the look-back rule to incur Eligible Expenses; and
ii. Eligible Expenses will be deemed to have been incurred up to one year earlier than the date they were actually incurred for the purposes of the Part XII.6 tax that is levied on issuers that use the look-back rule.
While the Draft Legislation is expected to be passed as proposed, resource issuers face uncertainty as to whether they may rely upon the proposed measures for the purposes of filing their income tax returns.
It is the Canada Revenue Agency’s (the “CRA”) longstanding practice to ask taxpayers to file their tax returns based on proposed legislation. In a recent technical interpretation (2020-0874621E5), the CRA confirmed that this remains its practice.
Specifically, the CRA addressed concerns relating to the Draft Legislation in the technical interpretation. The CRA stated that it will generally not reassess an initial assessment if it was correct in law. It would therefore refuse a request by a taxpayer to amend its tax records to reflect proposed legislation. The CRA therefore recommends that taxpayers file their tax returns, including any Part XII.6 Tax Returns (Form T101C), based on the Draft Legislation. If the Draft Legislation is not passed as proposed, the CRA will waive penalties and/or interest “as appropriate”, provided that taxpayers who have filed tax returns based on the Draft Legislation “acted reasonably in the circumstances, took immediate steps to put their affairs in order, and paid any taxes owing.” The CRA also recommends that “taxpayers file a waiver in respect of the normal reassessment period to protect their interests.”