CRA illustrates how draft s. 211.91(2.1) would reduce Part XII.6 tax from delayed CEE under the look-back rule

CRA discussed a simple example showing how draft s. 211.91(2.1), which relevantly provides that Part XII.6 tax is to be applied (in the context of a 2019 flow-through share agreement, or “FTS agreement”) as if the renounced CEE was incurred in January 2020, if the expenses were incurred in 2020 and, otherwise, 12 months earlier than when they were actually incurred. (An analogous rule applies to FTS agreements entered into in 2020.)

In January 2020, a principal-business corporation (“PBC”) renounces (with an effective date of December 31, 2019, under the look-back rule) $5M of Canadian exploration expense (CEE) on shares issued in December 2019 pursuant to the FTS agreement. The PBC incurs $3M of CEE in August 2020, and the remaining $2M in 2021.

In computing Part XII.6 tax of the PBC for February to June 2020, it is deemed to have incurred $3M of CEE before the end of those months, so that the tax would be computing (applying the prescribed rate of 2%) in accordance with the formula:

($5M - $3M) X (0.02/12 + 0/10) = $3, 333

so that the tax for each month during that period is $3,333.

The remaining $2M of CEE is deemed to have been incurred by the end of July 2020, so that the PBC would not have any Part XII.6 tax payable respecting its $5M renunciation after June 2020.

Given that draft s. 211.91(2.1) also extends the deadline for filing Part XII.6 tax returns by one year, the Part XII.6 tax return for 2020 would only be required to be filed before March of 2022.

Neal Armstrong. Summary of 24 February 2021 Internal T.I. 2020-0870401I7 under s. 211.91(2.1).