What are Flow Through Shares
Certain corporations in the mining, oil and gas, and renewable energy and energy conservation sectors may issue FTSs to help finance their exploration and project development activities. The FTSs must be newly issued shares that have the attributes generally attached to common shares.
Junior resource corporations often have difficulty raising capital to finance their exploration and development activities. Moreover, many are in a non-taxable position and do not need to deduct their resource expenses. The FTS mechanism allows the issuer corporation to transfer the resource expenses to the investor. A junior resource corporation, in particular, benefits greatly from FTS financing.
The FTS program provides tax incentives to investors who acquire FTSs by allowing:
-
deductions for resource expenses renounced by eligible corporations; and
-
investment tax credits for individuals (excluding trusts) on resource expenses in the mining sector that qualify as flow-through mining expenditures.
The Canada Revenue Agency (CRA) reviews all FTS arrangements. Audits are carried out to monitor the program.
How the flow-through share (FTS) program works
Individuals, trusts, corporations, and partnerships can invest in FTSs, but only the original investors can deduct the amounts renounced to them.
The corporation that issues the FTS must be a principal-business corporation (PBC). There must be a written flow-through share agreement between the investor and the corporation.
The corporation can then renounce and "flow through" eligible exploration and development expenses to the original investors. The type of expenses a PBC can renounce are:
-
Canadian exploration expenses (CEEs), which are added to the cumulative CEE (CCEE) pool and can be deducted up to the maximum of 100%; or
-
Canadian development expenses (CDEs), which are added to the cumulative CDE (CCDE) pool and can be deducted up to the maximum of 30%.
FTS investors may benefit from:
-
deductions from income through renounced expenses;
-
an investment tax credit (ITC) on flow-through mining expenditures for individuals; and
-
amounts renounced to the partnership, which can be allocated to the partners.
Individuals (excluding trusts) can claim a 15% non-refundable ITC for certain mining CEEs renounced on investments in FTSs of mineral exploration companies. The investor and the corporation must have entered into an FTS agreement on or before March 31, 2008. Under the "look-back" rule, funds raised with the benefit of the credit in 2008, for example, can be spent on eligible exploration up to the end of 2009.
source: Government of Canada