Bonterra faces CRA challenge on flow-through CEE

Executive Summary

• Bonterra Resources Inc. has been notified by the Canada Revenue Agency (CRA) of its intention to reclassify approximately $11.05-million of previously renounced Canadian Exploration Expenses (CEE) from flow-through share financings, asserting they do not meet the definition of CEEs.
• Bonterra strongly disagrees with the CRA's position, citing an incorrect assumption that the Moroy deposit is an extension of the Bachelor mine, and intends to vigorously defend its position and object to any forthcoming reassessments.
• The company faces a maximum estimated exposure of approximately $9.5-million regarding indemnification obligations to subscribers, interest, penalties, and anticipated Part XII.6 tax, with an initial liability of closer to $3-million expected to be accounted for in the financial statements for the year ending December 31, 2025.

Key Details

• Audit Scope: The CRA is auditing the renunciation of CEEs associated with private placements of flow-through shares that closed on December 13, 2019, and October 21, 2021, which generated aggregate gross proceeds of approximately $16.96-million.
• Disputed Amount: The CRA intends to reclassify approximately $11.05-million of previously renounced CEEs.
• Company Position: Bonterra disputes the audit findings, arguing the CRA incorrectly assumes the Moroy deposit constitutes an extension of the Bachelor mine. The company plans to object to any notice of reassessment.
• Subscriber Impact: The CRA will contact subscribers directly regarding reassessments of deductions. Reassessments for the December 2019 financing are expected first, with others following later in the year. Reductions in renounced CEE will be applied on a pro rata basis among subscribers of the same financing.
• Indemnification Obligation: Bonterra agreed to indemnify subscribers for tax attributable to disallowed renunciations of CEE. Subscribers receiving reassessments are invited to contact the company to exercise this right.
• Financial Exposure:
  • Maximum aggregate exposure (including indemnification, interest, penalties, and Part XII.6 tax): Approximately $9.5-million.
  • Initial anticipated liability for the first reassessments: Closer to $3-million.
  • Accounting Treatment: The company expects to account for this liability in its financial statements for the year ending December 31, 2025.
  • Note: The provision does not include potential effects on provincial tax credits received by the company.

Notable Quotes

• "CRA's notification relies on the incorrect assumption that the Moroy deposit constitutes an extension of the Bachelor mine, a finding that Bonterra strongly disagrees with."
• "Bonterra has voiced its disagreement with the proposed tax adjustments and the audit process followed by the CRA, and intends to continue to vigorously defend its position by objecting to any forthcoming notice of reassessment."