Flow-through shares were established in order to incentivize the resource sector to explore for oil, natural gas, and minerals. The Federal Government allows Canadian resource companies that invest in the oil and gas, mining and renewable energy sectors to renounce and “flow through” certain eligible exploration expenses, known as Canadian Exploration Expenses (CEE) or certain eligible development expenses, known as Canadian Development Expenses (CDE).
Canadian Exploration Expenses
Includes certain expenses incurred to determine the existence, location, extent or quality of a mineral resource or of an accumulation of petroleum or natural gas in Canada. Certain expenses incurred to bring into production a natural accumulation of petroleum or natural gas in Canada, or a new mine in a mineral resource in Canada may also qualify as CEE.
Canadian Development Expenses
Includes certain expenses for the development of an oil or gas well in Canada, or of a mine in a mineral resource in Canada.[i]
In issuing flow-through shares and passing along these eligible expenses to shareholders, the shareholders are then able to deduct those eligible expenses against their own taxable income as if the expenses were incurred directly by the shareholder. Canadian Exploration Expenses (CEE) are 100% tax deductible in year one, while Canadian Development Expenses (CDE) are 30% deductible on a declining balance basis starting the year of the flow through investment. Certain mining CEEs provide individual investors with an added federal tax credit of 15% and a provincial tax credit, the value of which varies province to province.
Flow-through shares can be purchased directly on an issuer-by-issuer basis, or can be accessed by investing in a flow-through limited partnership, which is a vehicle that is professionally managed, offers diversification and a broad range of flow through issues.
Tax considerations of investing in flow-through shares
|Example of Tax Savings*|
|(Assumption: $250,000 taxable income, Combined Marginal Tax Rate: 53.53%)|
|Initial flow-through investment||$ 100,000.00|
|Deductions claimed||$ (100,000.00)|
|Tax Savings @ 53.53% MTR||$ 53,530.00|
|Proceeds from disposition (assuming no gain or loss on investment)||$ 100,000.00|
|Adjusted Cost Base||$ 0.00|
|Capital Gain||$ 100,000.00|
|Taxable Capital Gain||$ 50,000.00|
|Tax on taxable capital gain @ 53.53%||$ 26,765.00|
|Net after-tax profit||$ 26,765.00|
|Total after-tax return on investment||26.76%|
|*Example only – for detailed tax calculations, please speak with your accountant|
Is Flow-Through Investing For You?
Flow-through purchases are best suited for those investors in the highest marginal tax bracket who are in a position to accept the heightened risk associated with purchasing shares of junior to mid-sized resource companies and obtain the highest tax deduction.
To learn more about flow-through investing and how it may be beneficial to you, contact your SprottWealth Investment Advisor today or book an appointment at 416-943-4383.