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.
All three can produce the same kind of tax deduction and credits. What differs is how certain the outcome is.
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 issuer indemnity. If your deduction is reduced, the issuer is contractually required to pay you an amount equal to the resulting tax. There’s no waiting for a final ruling, which could take months or even years: payment is due within 30 business days of your receiving a notice of reassessment from CRA. This puts the cost of any issuer failure back on the issuer itself.
Who does what
Ken: education and planning
I educate you on how the strategy works and help you decide whether it fits your situation. I also work out a purchase amount that’s sized to avoid triggering Alternative Minimum Tax (AMT). Then I guide you through each step, from the first conversation to closing.
WCPD: the dealer behind every transaction
WCPD Inc. is the exempt market dealer that handles every transaction. It’s the firm that originated the structured flow-through model in 2006. It arranges each private placement, matching subscribers with mining issuers and with the institutional buyers who purchase the shares the same day. WCPD carries out due diligence on each issuer, prepares your cash-flow illustration and transaction documents, processes your subscription, and provides the tax documentation you need when you file.
Your accountant: involved only if you’d like
Your accountant doesn’t have to be involved. If you’d like us to consult with or educate your accountant, lawyer or another trusted advisor, we’re happy to answer their questions and work alongside them.
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.
No call required. I may send occasional writing on the same topic. Unsubscribe any time.
Ask a question, or book a meeting.
If you’d rather I speak with your accountant first, send them the For Accountants page. I’m happy to take it from there.
