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What is Flow-Through?

 In Market Insights

Flow-through shares (FTS) and flow-through investing are unique Canadian tax incentives designed to encourage investment in the resource sector, particularly in the areas of mineral exploration and development. This mechanism allows certain tax deductions available to resource companies to “flow through” to investors.

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Here’s a brief overview:

Basic Mechanism: When a resource company incurs eligible exploration expenses, it earns certain tax deductions. However, many exploration companies may not have revenue against which to apply these deductions. By issuing flow-through shares, the company can “renounce” or transfer these tax deductions to investors who purchase the shares. This allows investors to claim the tax incentives on their returns.

Tax Benefits for Investors: When an individual or an entity invests in flow-through shares, they can deduct the amount of their investment against their taxable income, potentially reducing their tax liability. This can be particularly attractive to high-income individuals who are seeking tax shelters or entities with high taxable earnings.

Investment Risks: Like all investments, there are risks involved. The resource exploration sector is inherently risky, and there’s no guarantee that an exploration company will make a commercially viable discovery. As such, while there are tax benefits, the underlying investment can be speculative.

Super Flow-Through Shares: In addition to the regular benefits of flow-through shares, there have been additional incentives introduced from time to time by the Canadian government and their provincial counterparts to further stimulate investment in the sector. One such incentive is the 15% federal tax credit for mineral exploration, which applies to “grassroots” exploration expenses. More recently, a 30% Critical Minerals Mining Exploration Credit was introduced. Provinces like British-Columbia, Saskatchewan, Manitoba, Ontario and Québec each have their respective tax programs.

Eligibility: Not all expenses qualify to be flowed through to investors. The Canada Revenue Agency (CRA) has guidelines that specify what expenses are eligible.

Holding Period and Sale: The holding period in a Limited Partnership would typically range between 8 and 60 months. If an investor sells their flow-through shares, any gain will be taxed as a capital gain. However, if there was a tax benefit from the flow-through of deductions, the adjusted cost base (ACB) of the shares for tax purposes would typically be zero. This means that the full amount of the sale proceeds would be considered as capital gains.

Limited Partnership Structures: Flow-through investments can sometimes be structured using limited partnerships, which pool together money from various investors to invest in a portfolio of flow-through share investments and therefore help mitigating risk.

When considering investing in flow-through shares or any other tax-advantaged investment, it’s essential to consult with a tax professional and/or investment advisor in order to understand all the implications and ensure it aligns with your overall investment strategy.

If you’re considering flow-through investments or want a deeper understanding of their implications, Marquest Asset Management is available to assist your tax expert and investment advisor. They have a dedicated team of professionals who specialize in this area and are ready and willing to answer all your questions. Don’t navigate the complexities of flow-through investing alone; let Marquest be your trusted partner in this journey.

How to contact Marquest Asset Management Inc.

Nadia Kazmi – Inside Sales

nkazmi@marquest.ca
Toll Free: 1.877.777.1541
Direct: 416.777.7364

Jean Claude Major – EVP, Sales

jcmajor@marquest.ca
Direct: 450.405.6664