Structured flow-through share transactions:
the underlying mechanics.
Prepared so a client or their accountant can evaluate the structure without a call. If a call is faster, my number is at the bottom.
The technical Primer
A practical guide for advisors: ACB, timing of investment tax credits, AMT, corporate CDA, US-citizen considerations, risks, and CRA reassessment history and indemnities.
Get the Primer1. The structure
An individual or CCPC subscribes for flow-through shares issued by a Canadian mining company. At the same time, a liquidity provider, typically an institutional purchaser, has agreed to buy the shares at a fixed price known before the subscriber commits. The subscription and resale are documented separately and settle moments apart.
The issuer renounces qualifying Canadian exploration expenses to the original subscriber, commonly effective December 31 of the subscription year. Subject to the offering terms and applicable tax rules, the subscriber can deduct the renounced amount against income as though the expenses had been incurred directly.
The subscriber’s net cost is the difference between the subscription price and the pre-agreed resale proceeds, plus the transaction fee. The subsequent purchaser assumes the ongoing share-price and illiquidity exposure after settlement.
Because flow-through shares generally have a nil adjusted cost base, the resale generally produces a capital gain equal to the proceeds received. Every cash-flow illustration will show and account for that gain.
For individual subscribers, the renounced amount may also qualify for the 15% Mineral Exploration Tax Credit or the 30% Critical Mineral Exploration Tax Credit, depending on the offering. Large subscriptions can trigger Alternative Minimum Tax; I help size each purchase to avoid it. Corporate subscribers claim the deduction but not the credits.
Purchaser subscribes for flow-through shares. Buy and sell prices are fixed in advance.
Shares are sold to an institutional purchaser at the pre-agreed price. Settlement moments apart.
Issuer renounces Canadian exploration expense to the subscriber.
2. Statutory basis
Renunciation of Canadian exploration expense to subscriber
Definition of Canadian exploration expense
Definition of flow-through share
Look-back rule; spending deadline in the following year
Issuer filing of the flow-through share agreement with CRA
General Anti-Avoidance Rule (GAAR)
Prescribed share rules
Information returns for flow-through share renunciations
3. On the public record
2012-0466731R3 - Donation of flow-through shares to a registered charity
General Anti-Avoidance Rule (GAAR) explanatory notes, Example 4 - sale of flow-through shares, treated as consistent with the object and purpose of the flow-through rules
Exempt Market Dealer, Ontario Securities Commission
Advance rulings apply only to the specific facts and taxpayers involved. They are cited here as public examples of CRA’s analysis, not as approval of any particular transaction.
4. Issuer due diligence
Before any deal is made available, WCPD assesses whether the issuer has both the operational capacity to complete its exploration program and the financial strength to stand behind its indemnity.
This includes, but is not limited to, reviewing its treasury, budget, planned use of proceeds, management track record, and whether the financing is proportionate to its realistic ability to spend and perform.
As a safeguard, the subscription documents include an issuer indemnity. If the amount renounced is reduced under ITA s. 66(12.73), the issuer is contractually required to pay the subscriber an amount equal to the resulting tax.
5. Compensation and independence
Neither Ken Stern nor any person or affiliated company receives compensation from the issuer of the flow-through shares or from the underwriter of the transaction. Ken Stern is a dealing representative of WCPD Inc., an exempt market dealer, and is paid only through WCPD. Any compensation and/or brokerage fee is disclosed by WCPD. The tax-deductible fee is always clearly shown in the cash-flow illustration, which is approved by the participant in advance of the transaction closing.
6. Direct line
Sample subscription agreement, indemnity agreement, and a worked example with the numbers
Further reading
What the 2023 GAAR explanatory notes actually say about flow-through structures
The Department of Finance addressed flow-through share investments directly. Here is the passage, and what it does and does not settle.
Start with the Primer.
A practical guide to how the transaction works, its tax treatment and its risks. It answers much of what people ask me at the start of their investigation.
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