A flow-through share (FTS) is a tax-based financing incentive that is available to, among others, the mining sector. A FTS is a type of share issued by a corporation to a taxpayer, pursuant to an agreement with the corporation under which the issuing corporation agrees to incur eligible exploration expenses in an amount up to the consideration paid by the taxpayer for the shares.
The corporation “renounces” to the taxpayer an amount in respect of the expenditures so that the exploration and development expenses are considered to be the taxpayer’s expenses for tax purposes. As a result of the corporation renouncing the expenses, the shareholder can deduct the expenses as if incurred directly.
According to CRA [2]: “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.”
When flow-through shares are donated, a lower after-tax cost of giving is achieved.
According to an independent website, PearTree Financial [3], “the flow through donation financing structure is designed to help major gift charitable donors in Canada significantly reduce their after-tax cost of giving and to ensure that the donor’s full pledge amount is gifted to the recipient charity. “The process begins with the donor subscribing for flow through shares thereby accessing the associated Canadian Exploration Expense (CEE) and investment tax credit benefits. The next step is for the donor to gift the shares to their chosen charity. The charity then sells the shares to an institutional investor, to receive their funds for which a tax receipt is issued to the original donor. Because all three steps must take place or the transaction cannot be completed, all funds are held in escrow until the completion of the transaction. In the event the transaction is not completed for any reason, all funds are returned to the donor.”