Abstract

The time deadlines for submission of this paper required it to be written months prior to its' actual presentation. We are hopeful that in this interim time period the Honorable Michael Wilson, Minister of Finance will not have rendered the paper obsolete. The federal government's tax reform package is promised for "the spring" of 1987. It is uncertain as to whether' tax reform will cause any further changes to be made to the flow-through share rules in the Income Tax Act. (l) However, at: the risk of being proven wrong, we do not believe any major changes will in fact be proposed regarding flow-through shares tor the following reasons:

  1. A major overhaul of these rules has recently taken place.

  2. Both government and industry appear to be happy with the changes from a technical standpoint.

  3. The investment community has used the new rules to raise Large sums of money to be spent on mining and oil and gas exploration therefore the rules York practically.

However, if our prophecy Proves incorrect you will be informed of "errors" in the paper.

The payer addresses two distinct sup-topics:

  • The new technical rules.

  • Examples or actual flow-through share financings carried out.

The New Rules

A. General: It is not intended to give an historical analysis of flow-through shares but rather historical comment will be rendered where necessary to provide better understanding of the provisions of the current flow-through share rules.

In general terms, the Income Tex Act provides that an investor may deduct: certain resource expenses "incurred" by a corporation. As consideration for the investor funding t:he exploration effort, the corporation issues the actual flow-through shares. In order to qualify for the tax deductions, an investor must subscribe for share of a corporation and the corporation must agree to incur resource expenses in an amount not less than subscription amount and to then renounce such resource Expenses t:o the investor. The ownership of the explored properties remains with the corporation. Any production income from these properties is the corporation's and a return is earned by the investor from the properties only indirectly through dividends on the shares or through appreciation In the value of the issued shares.

Flow-through share arrangements can be instituted not only by public corporations looking to raise money but also, in certain circumstances, by private corporations.

The following are the components necessary to have a flow-through share financing under the Income Tax Act.

  • A Flow-through share agreement.

  • A principal-business corporation.

  • An investor.

  • Investment Capital.

  • Exploration/Development Activities.

  • Renunciation.

  • Shares.

B. Component Analysis

  1. The Agreement. The flow-through share agreement is an agreement in writing, entered into after February, 1986, between the corporation and the investor whereby the corporation agrees to incur certain "resource expenses" within 24 months after the month the agreement was entered into.

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