Since 2022, we have seen important tax and securities law developments in Canada relating to flow-through shares. This Cassels Comment highlights some of the key flow-through share updates that issuers and investors should keep in mind as another year of flow-through financings comes to a close.
Critical Mineral Exploration Tax Credit (CMETC)
In 2022, the Federal government published its critical mineral strategy which outlined ambitious objectives and initiatives for Canada to become a global supplier of choice for critical minerals. One of the key tax measures that was announced by the federal government included a 30% federal critical mineral exploration tax credit (the CMETC), in respect of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. An investor is allowed to claim the CMETC in respect of certain minerals — namely, copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals, and uranium.
Unlike the 15% federal mineral exploration tax credit (the METC), an important requirement for certain expenses to qualify for the CMETC is that a qualified professional engineer or professional geoscientist must certify in prescribed form and within a specific period of time that qualifying expenses will be incurred pursuant to an exploration plan that primarily (i.e., more than 50%) targets these critical minerals. Many of the flow-through share financings that we are seeing this year include covenants providing for the CMETC. We remind issuers and their advisors to ensure that the certification is completed concurrently with a flow-through share financing and that all relevant documentation to support the certification is readily available in the event that the Canada Revenue Agency (CRA) requests to review the documentation. As a practical matter, the information needed to support the certification comes from the relevant technical report so this requirement should not be too onerous for issuers.
“Critical” Gaps in Provincial Taxing Statutes are Being Filled
Many provinces such as Manitoba, British Columbia, and Ontario offer tax credits with respect to specified exploration expenses renounced to flow-through share investors. When the federal CMETC was enacted, some provinces recognized that provincial tax legislation had to be amended to enable a flow-through share investor to claim the corresponding provincial tax credit for specified exploration expenses with respect to critical minerals renounced by an eligible exploration corporation.
For example, in December 2022, Manitoba Finance released a notice confirming the province’s intention to amend the Manitoba legislation to align with the federal income tax legislation with respect to the CMETC so that a taxpayer who subscribes for flow-through shares of qualifying mineral exploration companies may also claim the 30% provincial mineral exploration tax credit. Such intention was further confirmed in Budget 2023 released by the Manitoba Finance Minister on March 7, 2023.
In February 2023, the Ministry of Finance in Saskatchewan revised its tax legislation relating to the provincial mineral exploration tax credit so that a flow-through share investor who claims a CMETC with respect to certain specific exploration expenses may also be able to claim a corresponding provincial tax credit on mining exploration projects in Saskatchewan. Additionally, to improve the province’s competitiveness, Saskatchewan also increased its tax credit from 10% to 30%.
Most recently, on November 2, 2023, the Ontario Minister of Finance released its 2023 Fall Economic Statement and announced its intention to enhance the Ontario mineral exploration tax credit by expanding the eligibility to include specified critical mineral exploration expenditures that are eligible for the CMETC and renounced on or after January 1, 2023. Such measures are now law as of December 4, 2023.
Aligning provincial mineral exploration tax credits with the federal CMETC provides certainty to flow-through share issuers who engage in significant grass roots mineral exploration in these provinces.
Lithium IS a “Mineral Resource”
On August 4, 2023, the Department of Finance released draft tax legislation (to implement proposals from the 2023 Federal Budget) to include lithium from brines as a mineral resource to allow relevant issuers that undertake certain exploration and development activities to issue flow-through shares and renounce specified mineral exploration expenses to their flow-through share investors and to expand the eligibility of the CMETC to lithium from brines.
In implementing such proposals from the 2023 Federal Budget, the draft legislation has removed the requirement for flow-through share issuers to apply to the Minister of Natural Resources for a mineral resource certification (in respect of lithium) which is also beneficial for issuers that explore for lithium ore. If the draft legislation is enacted as proposed, the rules are deemed to come into force on March 28, 2023. Such measures are in Bill C-591 and is now passing through the legislature.
Currently, flow-through share issuers (exploring for lithium ore) that have entered into flow-through share agreements to renounce specified mineral exploration expenses need to obtain a certification from the Minister of Natural Resources certifying that the lithium extracted is an industrial mineral contained in a non-bedded deposit as they are generally not considered a base or precious metal deposit.
This proposal will alleviate the unnecessary delays and additional costs that many cash-strapped junior mining companies face when trying to obtain certification from the Minister of Natural Resources and demonstrates the federal government’s commitment to its critical minerals strategy.
Flow-through Share Transactions and the Mandatory Disclosure Rules
On June 22, 2023, new rules to enhance Canada’s mandatory disclosure regime were enacted. The new rules expand on the current reportable transaction rules and introduce new reporting obligations for specific transactions designated by the Minister of Revenue and uncertain tax treatments. The legislation expressly provides that a transaction or series of transactions that include the issuance of flow-through shares (where a certain information return is filed) will not be considered a reportable transaction. Since flow-through share issuers are required to file certain prescribed forms and supporting documentation including the flow-through share agreement with the CRA within a specific period of time in the course of a flow-through share financing, the express exclusion of flow-through share transactions from the reportable transaction regime makes sense.
As a diligence matter, advisors representing agents or underwriters on flow-through share financings should ensure that appropriate representations and covenants from issuers relating to the filing of prescribed forms and the flow-through share agreement with the CRA are included in flow-through share agreements.
“LIFE” Offerings of Flow-through Shares
Since November 2022, issuers have been permitted to provide for offerings in Canada of freely tradeable listed equity securities without a prospectus, in reliance on the listed issuer financing exemption under Canadian securities laws (commonly referred to as “LIFE” offerings). On June 1, 2023, the Canadian Securities Administrators (CSA) published guidance on LIFE offerings and the availability of the exemption in the context of flow-through share offerings. The CSA clarified that LIFE offerings of flow-through shares would be permissible provided that the flow-through shares meet the definition of “listed equity securities” and that all other conditions of the LIFE exemption are met. Moreover, an issuer could use the LIFE exemption to distribute flow-through shares as part of a charitable donation structure. As a series of trades that occur instantaneously, the CSA would view the charitable flow-through structure as a single ongoing distribution to the end purchaser. Since this is a distribution by the issuer to the end purchaser, the end purchaser has the benefit of all statutory rights under the exemption.
2023 has been another busy year for flow-through share financings and for issuers engaged in the exploration of critical minerals. The various proposed and enacted tax rules and administrative guidance discussed above present many opportunities for critical minerals issuers to help advance Canada’s critical minerals strategy and promote investment in Canadian mining in the years to come.
Please contact any member of our Taxation or Securities Law Groups for more information.
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1 An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023