New flow-through share rules are here

"A t last the legal red tape which has tied up flow-through share financing has been cut. New rules effective for deals signed after 1986 simplify flow-through financing by removing the necessity f or cumbersome agency relationships. But there is no free lunch-the new rules require increased government reporting. And beware federal tax reform promises to have a good look at the new flow-through share rules. IntroductionFlow-through shares have always worked better in theory then reality as an effective financing tool. The concept is straightforward: a transfer of risks, tax deductions, and potential returns. But the mechanics of the old flow-through rules made the transfer of risk impractical to impossible by placing the responsibility for incurring Canadian exploration expense (CEE) on investors. The new rules are significantly more realistic, shifting that responsibility to the issuing corporation. However, every silver lining must have a few clouds around it. In the case of the new flow-through rules, the more obvious negatives are increased reporting requirements and reductions in CEE eligible for flow-through by amounts of assistance received. The new rules are effective for deals signed after 1986, however, so a few old-style deals are still around. Practical Difficulties with Old RulesThe old rules which applied to investments in flow-through shares were structured so as to make it the responsibility of the investor, rather than the issuing corporation, to perform the Canadian exploration expense for flow-through. Since most investors had neither the expertise nor the inclination to incur the CEE, this requirement necessitated the use of cumbersome arrangements whereby the investors would appoint an agent (usually the issuing corporation) to incur CEE on their behalf. Although the issuing corporation might consequently be the party which actually spends the flow-through share funds on CEE, the awkward legal structure of such an arrangement made the investor the ""principal"" incurring the CEE. As such, the requirements of the old rules were met and the investors could receive their flow-through share s."