What are Flow Through Shares?
Flow-Through shares are one of the few remaining tax-assisted investment vehicles available to investors in Canada. Since the introduction of the tax system in 1954, the Canadian government has been working on additional ways to encourage exploration and development in the resource sector. In the 1993 Federal budget, the government allowed certain investors to deduct exploration expense against income.
Flow-through shares do not exist to circumvent any tax rules or to take advantage of any loopholes in the Tax Act. These flow-through shares benefit from certain provisions within the Tax Act that were explicitly created by government, as mentioned above.
The flow-through share investment allows investors with higher marginal tax rates to reduce their income through the receipt of tax credits. However, the suitability of each investment must be considered in the context of the client's risk tolerance and investment objectives.
A flow-through share is simply a common share of an oil and gas company. The name "flow-through" is attached because the resource company enters into an agreement with the shareholder to ‘flow through’ to the shareholder the tax credits the resource company has created from exploration. These are tax deductions that are generated from the company's capital expenditure programs (CEE - Canadian Exploration Expense).
Typically, a flow-through share has the following characteristics:
- Up to 100% tax deductible;
- Typically, a flow-through share distribution is conducted as a private placement, which are only eligible for "accredited investors" and subject to re-sale restrictions for a period of at least four months;
- An agreement that covers the resource company's obligations to ensure the expenditures are made in accordance with the Canadian Income Tax Act.
