Whaler,

I did refer to the site yesterday on S.H. Saw you over there so thought you would have read it. The site is Natural Resources Canada. The web site is www.nrcan.gc.ca

Here is one of the questions and answers on the site.

Q.

When does the mineral exploration company incur interest costs for unspent funds raised by FTS financing?

A.

In order for qualifying expenses to be deemed to have been incurred at the end of a particular taxation (calendar) year, the corporation must renounce those expenses no later than the end of March of the following year. The issuer must incur eligible exploration expenses by the end of that latter year. The issuer must pay an interest charge on each monthly unspent balance (amount renounced minus cumulative incurred eligible expenses) after March 1st of the year after the one in which the expenses are deemed to be incurred for tax purposes. The monthly interest rate is 1/12 of the annual interest rate prescribed for the purpose of subsection 164(3) of the Act, pursuant to regulation 4301(b), which is colloquially referred to as the T-bill rate + 2%.

At the end of this calendar year, a fee will be imposed if the share issuer company has unspent funds. This fee amounts to 10% of the unspent amount. Investors are not subject to the charges on unspent funds and to the 10% fee. However, they will have to include the unspent portion of their FTS investment into income for income tax purposes. To illustrate how this process works, here is an example:

• On June 1, 2001, Ms. Investor purchases Flow-Through Shares from XYZ exploration company for $1000.
• For the year 2001, Ms. Investor receives a $1000 deduction and claims a $150 tax credit for her FTS investment.
• XYZ exploration company can wait until March 1, 2002, to spend the proceeds of Ms. Investor's FTS without incurring an interest charge.
• After March 1, 2002, XYZ exploration company has until the end of December 31, 2002, to spend the money that it raised, but it must pay a monthly interest charge on the unspent fund balance at the end of each month.
• If there are still unspent funds after the end of 2002, a fee of 10% of the unspent funds would apply and this would be paid by XYZ exploration company.
• If only $800 of the original $1000 FTS investment of Ms. Investor was spent, she would receive the $200 in unspent funds and include this amount into income for her 2002 personal income tax return.

There are also penalties for a company that renounces an amount in excess of the amount that it is entitled to. There is a penalty under subsection 162(7) of the ITA for failing to reduce the renunciation under subsection 66(12.73)(a)(i) within 30 days of being notified in writing by the Minister or, if under subparagraph 66(12.73)(a)(ii), before March of year three. This penalty will the median value of the following amounts or if two amounts are the same, then that amount would be applied as the penalty.

• Minimum penalty $100
• $25 × number of days in default
• Maximum penalty $25 × 100 days ($2500)

A person who, knowingly or under circumstances amounting to gross negligence, has made or has participated in making a false statement or omission with respect to renounced expenses may be liable to a penalty of 25% of the amount of such excess in accordance with subsection 163 (2.2) of the ITA.