Background
Bco, a U.S. public company, also is a principal-business corporation as substantially all of its assets are shares and debt of related principal-business corporations. Aco, a wholly-owned Canadian mining and exploration subsidiary, has four “unproven resource properties” (the “Properties”) at a stage such that exploration expenses incurred thereon would still qualify as Canadian exploration expense (“CEE”).
Proposed transactions
Bco will purchase Aco’s interest in Property 1 and Property 2 (being mining claims) in consideration for the reduction of the intercompany debt owing by Aco to Bco, with Aco including the proceeds of disposition in element F of the definition of “cumulative Canadian development expense.”
Bco will issue common shares as flow-through shares by private placement or through a public offering by way of prospectus, with the net proceeds used to finance exploration programs on the Properties, including exploration on Properties 1 and 2.
Aco and Bco will enter into option agreement (the “Farm-in Agreements”) whereunder Aco will grant, on normal commercial terms, exclusive options to acquire undivided working interests in Property 3 or Property 4, as the case may B, based on Bco incurring specified expenditure levels on Property 3 or 4, as the case may be. The working interest in each case will equal the specified expenditures divided by the fair market value of the property (being only mining claims) at the time of option grant. The Farm-in Agreements will be “simple farm-out transaction” as per IT-125R4.
It is not expected that any new mine resulting from the exploration work at Properties 1, 2 and 4 will use the workings at the previous abandoned mines and would instead be operated independently. (There had not been a mine on Property 2.)
The expenditures to be renounced to a flow-through share investor will not include any amount incurred before in the case of Properties 1 and 2, the date an interest in such Properties is acquired by Bco and, in the case of Properties 3 and 4, the date that the applicable Farm-in Agreement has been executed.
Additional information and purpose
After the renunciations and, in the case of Properties 3 and 4, after Bco has earned its working interests in such Properties pursuant to the Farm-in Agreements, Bco may transfer its interests in one or more Properties to Aco under s. 85(1) (in the case of Property 3 or 4, for a nominal elected amount).
The purpose for having Bco rather than Aco issue the flow-through shares is that the flow-through shares would be publicly listed on the XXXXXXXXXX and would be more attractive to investors. However, it is intended that the flow-through shares will be issued only to residents of Canada.
Rulings
Including re qualification of expenditures under CEE – (f).