New provincial budget rules — Some Ontario juniors eligible

In its May 19 budget, the Ontario government announced a change to the province’s capital tax legislation which will bring relief to companies which issue flow-through shares.

After almost 18 months of discussions with representatives of the Prospectors and Developers Association of Canada, the Ministry of Finance has promised to rectify an anomaly in the capital tax rules which has resulted in these companies paying more capital tax than they should have. The change will be retroactive to taxation years starting after 1985.

A company that carries on business in the province is required to pay an annual capital tax of 0.3% of the company’s “taxable capital.” Taxable capital is defined to include share capital issued by the company. Thus, a company whose balance sheet shows issued share capital of $10 million can expect to pay $30,000 annual capital tax.

For the past several years, though, the rules have provided relief to companies which explore in Canada. In effect, to the extent that shares have been issued to finance Canadian exploration activities, the amount of capital related to these particular shares is not included in taxable capital and, therefore, does not attract capital tax. For example, where a company’s share capital of $10 million was issued to fund exploration programs, no capital tax would be payable.

The problem for flow-through share issuers was that flow-through shares have not been eligible for this capital tax exemption — the special relief was available only to share capital other than flow-through shares. However, the budget papers will rectify this inequitable treatment of flow-through shares through an amendment to the capital tax legislation that will deem the paid-up capital of flow-through shares to be nil. This deeming provision will effectively exclude flow-through share capital from the capital tax base. It will be important for mining and exploration companies to review their Ontario capital tax returns going back to 1986 to see if they have overpaid prior years’ capital taxes and to determine whether or not they can obtain a refund of such taxes.

— Robert Parsons is a partner with Price Waterhouse in Toronto.