Subscription and sale, settled moments apart.
This page is for the person who wants to verify the claims rather than take my word for it.
The transaction
A Canadian resource company raises capital by issuing flow-through shares from treasury. 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.
In a structured flow-through deal, an institutional buyer agrees in advance to buy the shares from the subscriber at a fixed price. The subscription and resale are coordinated transactions completed moments apart on the same closing day. The resale price is agreed to in advance, before you commit. There’s no window in which the subscriber holds an unhedged position, so there’s no exposure to share-price volatility. The subscriber receives the applicable deductions and resale proceeds, less the disclosed transaction fee. The transaction is structured within CRA guidelines.
The comparison, expanded.
The tax treatment is identical in all three. What differs is certainty of the outcome.
Same day flow-through is the only structure we offer. The other two are shown for comparison only.
The shares are held. A resale restriction of four months and a day is typical, and where the share price lands at the end of that window decides whether you finish ahead after tax.
Flow-through LPs typically invest in multiple flow-through offerings which provides a degree of diversification. On average, units are held 10 to 24 months, sometimes longer, before rolling over into a liquid mutual fund. It’s hit and miss as to whether drawdowns inside that window will end up negating the tax benefits. On occasion it can work out well when there is share appreciation during the illiquid period but the outcome is always uncertain.
Issuer due diligence
Before any deal is made available, WCPD assesses whether the issuer has the operational capacity to complete its exploration program and the financial strength to stand behind its indemnity. The review includes, but is not limited to, the issuer’s treasury, budget, planned use of proceeds, management track record, and whether the financing is proportionate to its realistic ability to spend and perform. The transaction documents also include an issuer indemnity if a tax reduction or disallowance results from the issuer’s failure to meet its obligations.
The indemnity agreement
The subscription documents include an indemnity agreement saying that if the issuer’s own conduct causes any tax benefits to be disallowed, the issuer indemnifies subscribers. No waiting for final adjudication which could take months or even years. Meaning, the issuer will reimburse any reversed deductions on or before 20 business days following receipt of any notice of reassessment (NOA). This puts the cost of any relevant issuer’s failure back on the issuer itself.
Start with the Primer.
A guide to the tax benefits and mechanics of flow-through shares. One transaction, completely outlined, start to finish. It answers much of what people ask me at the start of their investigation.
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