One of the financial incentives made available to the mining industry is flow-through shares (FTS). A FTS is a tax-based financing incentive and is a type of share issued by a corporation to a taxpayer. Corporations using FTS must be a principal business corporation (PBC). This is a corporation whose main business is mining or exploring for minerals, the processing of mineral ores for the purpose of recovering metals or minerals, fabricating metals, or marketing of metals or minerals.
The agreement between the two parties includes the PBC agreeing to incur eligible exploration expenses in an amount up to the consideration paid by the taxpayer for the shares. The corporation “renounces” to the taxpayer an amount in respect of the expenditures, so that the exploration and development expenses are considered to be the taxpayer’s expense for tax purposes. As a result of the corporation renouncing the expenses, the shareholder can deduct the expenses as if they were incurred directly.
Only certain expenses qualify for flow-through as eligible expenses. They include the following expenditures:
• “Grass-roots” expenditures – These are expenses incurred for the purpose of determining the existence, location, extent or quality of a Canadian mineral resource. Examples include carrying out geological surveys, drilling by rotary, or trenching, digging test pits and preliminary sampling.
• Pre-production expenses – These are expenses incurred to bring a new mine into production in reasonable commercial quantities, including an expense for clearing, stripping, sinking a mine shaft, or other underground entry.
“Grass-roots” exploration expenses are also qualified for a super flow-through share (SFTS). These are expenses incurred only from surface exploration. A SFTS provides an individual shareholder 100% deduction for exploration costs renounced by the PBC, plus a 15% non-refundable investment tax credit. Provincial tax credits (such as those in British Columbia, Manitoba, Ontario and Saskatchewan) may also be available.
The Canada Revenue Agency (CRA) also provides their thoughts on what common expenses qualify for FTS. The following is a brief list of rules based on CRA’s current views on FTS and what they look for when auditing FTS offerings:
• Drilling, metallurgical testing and associated costs incurred to confirm reserves should qualify;
• Costs incurred that would be included in the capital cost of depreciable property (e.g. road/drilling equipment or construction of housing facilities) do not qualify;
• Overhead expenditures do not qualify;
• Study costs associated with the assessment of mine development options and/or profitability of developing the deposit into a mine will not qualify;
• Costs related to issuing shares, compliance with regulatory requirements, and audit and legal fees do not qualify;
• Consultation costs to gather community attitudes and community information programs do not qualify;
• Feasibility studies to help a company in its decisions on whether to bring the mine into commercial production may qualify; and
• Costs associated with environmental assessments to meet a legal or informal requirements to obtain a permit do not qualify
To be qualified for a FTS, the PBC must incur eligible expenditures, as outlined above, during the following period:
• Begins on the date the subscription agreement is signed
• Ends 24 months after the end of the month the subscription agreement is signed
Renunciation must occur before March of the first calendar year that begins after the 24-month period expires. It’s important to note that the amount renounced by the corporation cannot exceed the gross proceeds received by it from the investor for the share.
Investing in FTS involves a number of regulations that can be difficult to understand immediately. Corporations that don’t fully comprehend what a FTS involves can be subjected to significant liabilities, including an obligation to compensate FTS holders for the loss of promised tax benefits. Therefore, it’s imperatives for mining executives that raise exploration funding using FTS to understand the rules and become aware of how the CRA audits such offerings and what expenses qualify for flow-through. By conducting this research in advance, PBCs can start the FTS process on the right foot.
For more information, please visit PwC’s mining site at: www.pwc.com/ca/mining.