Reducing Taxes & Helping The Economy – Flow Through Financing Is a Win-Win For Canada

November 9th, 2016 by Dan Rothberg

Flow-through financing refers to the issuing of flow through shares by Canadian resources companies where tax deductions from resource explorations “flow-through” to the company’s investors.

The Canadian Revenue Agency explains how the flow-through share programs works here.

To develop a mine, companies often have to spend substantial sums of money before they are in any position to generate any revenue, creating large tax losses. As these companies are not in a position to benefit from their tax deductions, flow-through investing gives the resource companies the ability to pass on their deductions to investors, in exchange for help raising the money necessary to fund their explorations. Specifically, investors can deduct the resource company’s Canadian Development Expenses (CDE) and their Canadian Exploration Expenses (CEE) against their personal taxes. In total, flow through financing creates a win-win situation that benefits both Canadian mining companies, and Canadian taxpayers, as the Government of Canada uses the free market to help incentivize resource extraction.

Throughout Canada, CEE expenses are 100% deductible. Additionally, the federal government offers another tax benefit, the Mineral Exploration Tax Credit, which provides a 15% non-refundable tax credit on eligible resource expenses. To make things even more attractive, certain provinces have additional benefits to help further encourage resource exploration in their territory. British Columbia (20%), Saskatchewan (10%), Manitoba (30%) and Ontario (5%) offer tax credits to provide an even better deal for residents of those provinces, for local explorations. Similarly, Quebec allows for a deduction of up to 150% of GEE provided that a similar criteria is met. Together, flow through shares often provide greater than a 100% deduction on one’s taxes, making flow through financing an extremely attractive investment.

Flow through investing can benefit taxpayers in the following ways:

1) Reducing one’s marginal tax rate by deducting the resource company’s expenses against their tax obligation;

2) If the resource exploration is successful, and the company’s stock price increases, earning a profit for the investors;

3) Utilizing prior capital losses as flow through share investments effectively convert income to capital gains

 

For more information on Capital Markets & Securities and Corporate Services & Acquisitions, please contact Devry Smith Frank LLP lawyers.


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