Flow-Through Share FAQ

What is a flow-through share?

A share issued from treasury by a Canadian resource company that allows the company to renounce its eligible exploration expenses to the first purchaser of the shares. The investor deducts those expenses against their own income as if they had incurred the expenses themselves.

What does "Same-day Flow-through" mean?

The subscription and resale are coordinated transactions completed moments apart on the same closing day. The resale price is agreed in advance, before you commit. This structured transaction is sometimes referred to as same-day flow-through.

Why is there no holding period?

Flow-through shares are generally acquired through a private placement under a prospectus exemption, most commonly the accredited investor exemption.

Although the shares carry a restricted period of four months and a day, this does not necessarily require the original subscriber to hold them for that period. Under NI 45-102, an early resale is treated as a new distribution. That resale can nevertheless be completed immediately if it is made pursuant to an available exemption under NI 45-106, typically to another accredited investor.

In a properly structured transaction, the original subscriber sells the shares to the exempt-market institutional purchaser the same day at a pre-arranged price. The new purchaser then becomes the beneficial owner and assumes the price volatility and illiquidity risk associated with the shares. The restricted period remains attached to the shares and the original subscriber no longer has market risk exposure.

What am I actually out of pocket?

Your initial cash outlay is the difference between the amount you subscribe for and the agreed resale proceeds, plus the transaction fee. This is the cash outlay before taking the tax effects into account, not your final net after-tax cost. The fee and applicable tax effects are always shown in the cash-flow illustration you review before closing.

Subject to the offering terms and applicable tax rules, you can deduct the qualifying exploration expenses renounced to you by the issuer. Where the full subscription amount is renounced as qualifying expenses, the deduction equals that amount. Eligible individuals may also receive a separate investment tax credit of 15% or 30%, depending on the qualifying exploration activity.

Does the sale create a capital gain?

Flow-through shares generally have a nil adjusted cost base for tax purposes. As a result, their resale generally creates a capital gain equal to the sale proceeds. The applicable tax treatment of that gain is included in the cash-flow illustration you review before closing.

The capital gain is a planned part of the transaction, not a surprise afterward.

How long does the transaction take?

Once a deal is announced, I’ll send you a cash flow with the specifics of your transaction. You have 2-3 days to confirm you’re participating.

Once the account and subscription documents are complete and funds have been deposited into the WCPD trust account, the subscription and resale are completed moments apart on closing day.

Proceeds of sale are usually returned by wire transfer 3-5 days post closing. Timing depends on offering availability.

When in the year should I do this?

Deal flow can be somewhat unpredictable. Most people don’t really think about their tax burden until the end of Q3 and into Q4 when demand seriously ramps up.

When demand is relatively lower earlier in the year, deals can have marginally better metrics and there is always the risk of not getting an allocation before the year end. We have closed deals as late as December 31 and there have also been clients who waited until the last minute and didn’t get filled. The bottom line is, don’t wait until it’s too late.

Is this legal?

The structure rests on specific provisions of the Income Tax Act. CRA has issued advance income tax rulings on the donation version, most recently 2012-0466731R3. Rulings apply only to the specific facts and taxpayers involved, so they’re public examples of CRA’s analysis rather than approval of any particular transaction. The Department of Finance also addressed the sale of flow-through shares in its November 2023 GAAR explanatory notes, treating it as consistent with the purpose of the rules. The "For Accountants" page explains the transaction mechanics, compensation disclosures and issuer due diligence. If your accountant or tax advisor wants to review the statutory basis and relevant public references, please have them get in touch.

Will the CRA challenge it?

The relevant rulings and the Department of Finance commentary are public. Nothing on this site is a guarantee of tax outcome. Your filing position should be confirmed with your accountant or tax advisor. If they would like to review the statutory basis and relevant public references before you proceed, please have them get in touch.

Are you paid by the issuer?

No. No person or company affiliated with me receives any compensation from the issuer of the flow-through shares or from the underwriter of the transaction. I am a dealing representative of WCPD Inc., an exempt market dealer, and I am paid only through WCPD. Transactions are completed through WCPD, and any compensation is fully disclosed in the documentation.

Does the alternative minimum tax (AMT) affect this?

It can, depending on several factors including the type of income (T4 or ordinary income, eligible and non-eligible dividends, and capital gains) and any other contemplated deductions such as an RRSP deposit or charitable donations. While we can help assess ways to manage potential AMT exposure, it’s imperative to confirm the AMT calculation with your own accountant,

Who is this for?

Canadians and CCPC owners paying tax at the top marginal rate on employment, investment or business income, who also qualify as accredited investors.

Do I need to be an accredited investor?

Yes. These are exempt market transactions available only to accredited investors. The most common ways to qualify:

Individuals

Income: net income before taxes over $200,000 in each of the last two calendar years (or over $300,000 combined with a spouse), and you reasonably expect to exceed that level again this year.
Financial assets: alone or with a spouse, you own cash, investments and deposits worth more than $1,000,000, before taxes and net of any debt used to buy them or secured by them. Real estate doesn't count toward this test.
Net assets: alone or with a spouse, your total assets, including real estate, minus your total debts, are at least $5,000,000.

Corporations, including CCPCs

Net assets of at least $5,000,000 on the corporation's most recent financial statements, or
Every owner, directly, indirectly or beneficially, is an accredited investor. For most owner-managed CCPCs, that means each shareholder qualifies individually.

"Spouse" includes a common-law partner. Other categories exist, including current and most former registered advisers and dealers. WCPD confirms eligibility before any subscription.

Is there a minimum?

Based on income at the top marginal rate, $40,000 is the minimum amount to move the needle for an individual. For a CCPC, at least $100,000.

I own a CCPC. How does this apply to me?

Shareholders of Canadian-controlled private corporations face high combined corporate and personal rates on distributed profits. The structure gives shareholders a way to access corporate funds at a lower cost.

The strategy is generally aimed at corporate income taxed at higher rates, including passive investment income in a Holdco and active business income above the small-business threshold in an Opco. If your operating company’s income is entirely taxed at the small-business rate, the strategy would generally not be appropriate. Other corporate income or a separate Holdco should be assessed on its own.

Should I personally do the transaction or through my corporation?

That depends on where the income sits and what you and/or your accountant are trying to solve. It’s one of the first things I would want to discuss.

How much does this actually save me on a donation?

The arrangement combines a donation transaction with a cash-back transaction, completed concurrently. The combined net after-tax cost of giving can be approximately 25 cents per dollar donated instead of the usual 50 cents. Depending on the amount committed to the cash-back transaction and the participant’s tax circumstances, that cost can fall as low as one cent per dollar donated. The lower net cost reflects the combined result of both transactions, not the donation transaction on its own.

Does the charity have to do anything differently?

No. The shares are sold before the transaction closes, and a cash donation is forwarded to the charity. The charity never receives the shares themselves.

Is there a minimum donation size?

The arithmetic can work from roughly $10,000 and up. Below that, the documentation effort outweighs the benefit - but get in touch anyway and we may be able to help.

Do I have to commit to anything to talk to you?

No. I only get paid when a transaction takes place. If you want to hop on a call, it’s worth thirty minutes of your time. There’s no cost, no obligation and nothing to sign.

Can you speak to my accountant first?

Yes, that’s often the fastest route. Send them a link to this website and if they’re interested, I can take it from there. And if they’re not interested, I’d like to understand why.

What happens on a first call?

Most of the time people who call have very little understanding of flow-through shares, and if they are at all familiar, they typically don’t know about our same day flow-through structure. Even professionals such as investment advisors often don’t understand the math, even though they might have sold the limited partnership version in the past.

All of that is to say, a typical first call has me going through the basics: how the numbers work, and dealing with a few of the objections I hear most often. How come I didn’t know about this? Why does the government allow this? And of course, "it sounds too good to be true". After the call I follow up with one or more emails based on the conversation and the questions asked.