Flow Through Shares - Background Information

A flow‐through share (FTS) is a share, or the right to buy a share, of the stock of a mineral resource company where tax deductions “flow through” from the company to the investor. A flow‐through share is issued under a written agreement between a corporation and an individual. Under the agreement, the individual agrees to pay for the shares, and the corporation agrees to transfer certain mining expenditures to the individual. Flow-through shares were originally introduced to address an exploration financing inequity which arose between major and junior exploration companies. FTS investors can deduct their investments from otherwise taxable income. 

British Columbia Mining Flow-Through Shares (BC-MFTS) - “Super” Flow-Through Shares
 

In July 2001, the British Columbia government introduced a 20% non-refundable tax credit for qualifying grassroots exploration expenditures (funded by FTS Investors) made in BC. This was in addition to, and was harmonized with, the 15% Federal Mineral Exploration Tax Credit relating to FTS and the existing 100% deduction of Canadian Exploration Expense (CEE) which ceased to be available for FTS agreements issued after 2005. The March 2010 British Columbia budget extended those 20% tax credit provisions to the end of 2013. The March 2010 federal budget re-introduced the 15% credit for flow-through share agreements entered into before April 1, 2011, for expenditures that are incurred before 2011, or in 2012 pursuant to the "look-back" rules.

The 2006 British Columbia budget extended those 20% tax credit provisions to the end of 2008 and provide that certain expenditures (expenditures incurred in 2009 that are deemed to have been incurred in 2008) made before the end of 2009 are also eligible. The federal budget re-introduced the 15% credit for flow-through share agreements entered into after May 2, 2006 and before April 1, 2007, for expenditures that are incurred before 2008, or in 2008 pursuant to the "look-back" rules.

The B.C. Mining Exploration Tax Credit is a 20% refundable tax credit applied to qualifying grassroots exploration expenditures on base and precious metals, coal and some industrial minerals. The credit is available to BC tax-residing individuals and companies who incurred these expenditures. The program applies to expenditures made between August 1, 1998 and January 1, 2017.

What does this mean for BC investors?
 

A BC investor, with taxable income of more than $113,805 and who invests $1,000 in FTS shares, would receive tax credits and tax savings totaling $757 - partially offset the following year by $139 in taxes payable on the tax credits, for a net benefit of 62% of the investment. The tax benefits will vary dependent on the investor's marginal tax rate and jurisdiction of taxation. Currently, Quebec offers the largest potential tax savings for flow-through share investors because of its 150% tax deduction for qualifying exploration expenditures incurred in Quebec. BC still offers the best tax credit available in Canada.

Tax Deductions vs Tax Credits?
 

Eligible exploration expenditures have been 100% deductible against income from any source for over 20 years. These deductions shelter before-tax income. Tax credits apply directly to reduce taxes payable.

• A non-refundable tax credit reduces taxes to the extent of taxes payable.
• A refundable tax credit reduces taxes payable and then, if there is an excess, results in a cash refund.

BC and federal tax credits are non-refundable (the investor has to pay taxes in order to use the claim). However, unused credits can be carried back and applied against taxes paid in the previous three years or carried forward for up to 10 years; - or 20 years in the case of tax credits earned after 2005.

Tax credits are considered “assistance” for income tax purposes and accordingly they reduce the CEE pool. Both provincial and federal tax credits reduce the pool in the year following the one in which they were claimed.

For more information on Flow Through Shares, contact the Canada Revenue Agency Mining Incentives technical help line at (604) 666-8430.