Flow-through shares
What is a flow-through share?
A flow-through share is a special type of common share issued only in Canada by oil and gas or mineral exploration companies. These shares allow you to claim federal and sometimes provincial, tax deductions or credits, if the company completes these steps:
- File required forms with the Canada Revenue Agency (CRA)
- Obtain an eight-digit number for each specific flow-through share offering
- Send you tax receipts relating to the company’s exploration and development expenses
The company will likely charge you a higher price for a flow-through share than for its common shares. This reflects the tax benefit you’ll receive.
What risks does it have?
As a type of common share, flow-through shares have all the risks of a common share, and more.
Before considering potential tax deductions or credits, you need to first consider the risks of investing in the company. Never invest in something just because it offers tax deductions or credits.
Many companies that issue flow-through shares are mineral exploration companies, which have their own risks. There are important questions to ask if you’re considering investing in a mineral exploration company.
If you’re considering investing in flow-through shares, ask the company:
- If it qualifies as a Principal-Business Corporation (PBC). Only a PBC can offer flow-through shares. A PBC’s principal business operations are specified operations relating to oil and gas or mining or mineral exploration business. Check out the Revenue Canada website for the full definition, including the list of specified operations
- If the property is located in Canada. If it is not, then the company cannot issue flow-through shares relating to that property
- If it has filed all required forms with CRA
- For the eight-digit Tax Identification Number for the flow-through shares you’re considering, and a copy of the letter from CRA confirming the number
- For a copy of its annual financial statements and interim financial reports so that you can review the statement of comprehensive income or income statement to verify how much it spent on exploration expenses
There is a risk that the company and its expenditures may not meet the strict government requirements to offer flow-through expenses to you. If that happens, you may not be able to claim the tax deductions that you expected or CRA may reassess your return. In that case, you may have to pay back taxes, potentially many years after you made the investment.
When you sell flow-through shares, CRA will require you to pay tax on the total sale price. This is because you were able to claim the full amount of your purchase price as a tax deduction as long as the company met all the requirements.
If you’re considering a private company’s flow-through shares, you need to consider these risks relating to tax deductions, and the additional risks discussed under private companies.
Can you sell them easily?
It depends. You can sell flow-through shares like other common shares unless you want to take advantage of the tax deductions and possible tax credit, which usually require you to hold the shares for at least 18 to 24 months.
What are the associated costs?
Like common shares, the only cost of investing is paying the purchase or sale commission, or paying a fee to your advisor to manage your account. There should be no ongoing costs.
What are the expected types of returns?
There are two ways to make money on flow-through shares: tax deductions and/or an increase in price.
Like other common shares, they are subject to capital gains and losses.