Improved flow-through share rules

"Canada's mining industry has reason to celebrate the federal government's budget which was tabled on February 26, 1986. The budget contains an important proposal to improve the flowthrough share rules by effectively eliminating the investor's liability to third parties. This proposed rule change and other important budget proposals are the subject of this month's edition of Tax Notes. IntroductionWhile Finance Minister Michael Wilson's February 26, 1986 budget received a mixed reaction from business and labour leaders, the budget was mainly ""good news"" for the mining industry. A long-standing bugaboo in the flow-through share rules will be cleared up, a permanent set of rules will be installed for the tax treatment of Northern allowances, and limited partnerships will apparently be able to continue to serve a useful role in financing exploration programs. Flow-Through SharesThe present rules which apply to an investment in flow-through shares are structured in such a way that the relevant Canadian exploration expense (""CEE"") must be incurred by the investor, and not by the issuing corporation. Obviously, in the case of most flow-through share issues, this requirement that the investor incur the CEE poses a practical problem-the investor typically does not have the expertise or organization to incur the CEE. As a result, an integral part of most flowthrough arrangements is an agreement whereby the investor appoints another party (usually the issuing corporation) as his agent to spend the flow-through funds on CEE on his behalf. Although the issuing corporation might consequently be the party which actually spends the flow-through share funds on CEE, nevertheless the legal structure is such that the investor is the ""principal"" who is incurring the CEE. As such, the investor is legally responsible for any third-party claims with respect to the exploration program. Third-party liability might arise, for example, in the case of property damage, personal injury, environmental infractions, and so on."