Frequently Asked Questions
What is a Flow Through Share?
A Flow Through Share is a common share issued by an eligible Canadian mining corporation to a Canadian taxpayer pursuant to an agreement under which the issuing corporation agrees to incur “qualifying exploration and/or development expenses” in an amount up to the consideration paid by the taxpayer for the shares. The corporation “renounces” to the taxpayer an amount in respect of the expenditures, so the exploration and development expenses are considered for tax purposes to be expenses of the taxpayer. As a result of the corporation's renouncing of the expenses, the shareholder can deduct the expenses as if incurred directly.
Who is eligible to issue flow through shares?
The issuer of a Flow Through Share must be a Canadian based principal business corporation (PBC) which means that its principal business is mining or exploring for minerals for the purpose of recovering metals and/or minerals from the ground. The mine site MUST be in Canada.
Tax benefits for the initial subscriber
The only entity entitled to the tax benefits of flow through shares is the original subscriber (when these shares are purchased, the purchaser is known as the “subscriber”). The initial subscriber is entitled to receive the tax benefits of qualifying expenditures even if the shares are owned for a brief period of time.
What if I don’t have enough income to write off the entire amount of flow through shares purchased?
You can carry back the deduction to the prior three years or carry forward for 20 years.
I have capital losses from other investments
If you sold investments and created a capital loss that you have not yet claimed, it can be carried back three years and forward indefinitely. This allows you to offset other capital gains against these losses, thereby reducing the tax you pay. The capital gains resulting from the sale of your investment can be offset against any unused capital losses you may have.
Can Flow Through Shares be used in connection with charitable giving?
he answer is Yes! If one purchases $50,000 of flow through shares, they would get the applicable tax benefits. The investor could then donate the shares – or better yet, donate the cash proceeds of sale - to the charity. In this example, if the purchase price is $50,000 and the sale price was $40,000, they would get a charitable donation receipt for $40k. This means a donor can make a gift to their charity of choice at a lower effective out-of-pocket cost.
Are the tax benefits legitimate?
Yes. The tax benefits associated with flow-through shares are well-accepted in Canada and have been in place through legislation since 1954. One reason the government provides for this incentive is the funds invested stay in Canada and are used to create genuine and valuable economic activity and growth within Canada’s mining and energy sector. The tax deductions are only available to those people who pay Canadian taxes.
What is ACB (Adjusted Cost Base)?
The adjusted cost base or “ACB” of a share is generally what you paid for it. However, with flow through shares, because of the tax benefits and write-offs received, you are deemed to have an adjusted cost base (ACB) of zero.
Will I have to pay tax when I sell my flow through shares?
Since you have written off the entire cost of the flow through shares, the adjusted cost base or ACB is zero. That means when you sell the shares you must declare a capital gain, only half of which is taxable.
Why are flow-through shares issued?
Flow-through shares are the product of a tax policy that provides seed capital to mining companies, thereby funding their efforts to explore for valuable resources. Those who purchase the shares receive a 100% tax deduction.
CEE vs. CDE (Exploration vs. Development) expenses
CEE generally includes eligible expenses incurred by an Exploration Company during the exploratory phases for petroleum, natural gas or mineral resources. 100% of CEE renounced to an investor in a year may be deducted from income by the investor for the year. CDE generally includes certain eligible costs of acquiring and preserving rights to a “Canadian resource property” having known mineral reserves, expenses incurred to bring a mineral into production in reasonable commercial quantities and post-production expenses incurred in sinking, excavating or extending a mine shaft, main haulage way or similar underground work. CDE is generally deductible at a rate of 30% per year. However, the Minister of Finance announced measures in 2018 to accelerate the deduction of certain CDE incurred after November 20, 2018 by an additional 15% to 45% per year. The accelerated deduction will be phased out starting in 2023 and will be eliminated by 2028.
What are the risks?
Once you purchase the flow-through shares and have taken the CEE deduction, you are relying on the company to spend the money appropriately and within government guidelines. In addition, if the total sum of the invested capital is not spent on exploration within the allotted time (typically 24 months), you may be retroactively denied the CEE deduction. The funds cannot be spent by the corporation on overhead or administrative expenses.