The concept of Flow-Through Shares originated as part of a government initiative to promote exploration and development in certain resource based industries such as mining. At the exploration and development stages, resource companies often cannot take advantage of expense deductions because they are not yet profitable. The idea of a Flow-Through Share is that in connection with the sale of shares, the resource company agrees to incur certain expenses and renounce related deductions in favour of the investor who funds the expenses through the share purchase price. The investor can then deduct the expenses up to the amount of the purchase price against personal income.
Investment in Flow-Through Shares can be directly by way of purchasing specific Flow-Through Shares or by purchasing units in what’s called a Flow-Through Limited Partnership. A Flow-Through Limited Partnership is akin to a Mutual Fund. The limited partnership buys a diversified portfolio of flow-through shares and investors purchase units in the limited partnership. There are advantages and disadvantages to investing in specific Flow-Through Shares versus units in a Flow-Through Limited Partnership.
Many but not all flow-through investments qualify as publicly traded securities. For those that do, the combination of the deductions associated with flow-through aspect, the elimination of capital gains tax and the donation credit can yield significant benefit for the donor.
There are several factors that will determine the value of the tax receipt:
- Generally, if the flow-through investment is no longer subject to any hold period or other restrictions, then a receipt can be issued for the fair market value as evidenced by the close of bid price or mid-point between high and low on date of gift.
- If the flow-through investment is still subject to a hold period or other restrictions this will give rise to valuation issues and independent appraisal may be required.
This is a very sophisticated and high risk investment tool which requires the donor to engage a professional financial advis