Flow Through Shares Tax Benefits

Introduction

Flow through shares offer one of the most generous tax incentives available to Canadian investors. They were created to support exploration and development in the resource sector by allowing companies to transfer certain expenses directly to investors. For individuals seeking meaningful tax reduction, flow through shares can provide substantial deductions, credits, and long term planning benefits.
 

However, these incentives come with complexity. Flow through share investments involve higher risk, strict rules around deductions, and long term tax implications that investors must understand clearly. For those who use them strategically, they can reduce current year taxes, support future planning, and enhance overall portfolio outcomes.

What Flow Through Shares Are and Why They Exist

Flow through shares are a special type of investment issued by mining, oil and gas, and renewable energy companies. These companies often incur significant exploration and development expenses that may not generate revenue immediately.
 

The government allows these companies to transfer their tax deductions to investors.
 

When an investor buys flow through shares, the issuer agrees to renounce eligible expenses to the investor. This means the investor can deduct these expenses from their own taxable income.
 

These deductions can dramatically reduce taxes in the year they are claimed, making flow through shares highly attractive for high income earners.

How Flow Through Shares Reduce Taxable Income

The main benefit of flow through shares is the ability to deduct exploration and development expenses.

These deductions often equal the full amount of the investment.

For example, an investor who puts in a significant amount may deduct that entire amount from taxable income, reducing overall tax liability.

Because tax rates increase with income, individuals in higher brackets benefit the most. The deductions offset income that would otherwise be taxed at the highest marginal rate.
 

This creates an immediate and measurable tax advantage.

Additional Tax Benefits From Mineral Exploration Tax Credits

Beyond regular deductions, investors may also qualify for mineral exploration tax credits. These credits apply federally and, in some provinces, at the provincial level.
 

Credits reduce tax payable directly rather than reducing taxable income.
 

This creates a layered benefit where investors first deduct the expense, then apply credits to reduce remaining tax.
 

The combination of deductions and credits makes flow through shares one of the most tax efficient ways to support resource sector investment.

The Role of Limited Partnerships in Flow Through Investing

Many flow through investments are offered through limited partnerships.
 

A limited partnership pools investor funds, purchases flow through shares, and allocates expenses and tax benefits to each partner.
 

Partnerships often include professional managers who evaluate companies and monitor compliance with renunciation requirements.

This structure helps investors access diversified portfolios rather than purchasing flow through shares individually from a single issuer.
 

It reduces concentration risk while still delivering tax advantages.

Understanding the Risks of Flow Through Shares

Flow through shares provide strong tax benefits, but they are considered high risk investments.

Resource exploration companies are early stage operations with uncertain outcomes. They may not generate revenue, and the value of the shares after the tax benefits are realized may be significantly lower.

Investors must be prepared for volatility, illiquidity, and the possibility that the underlying investment declines in value.
 

The tax benefit compensates for this risk, but it does not eliminate the investment uncertainty.

The Impact of Adjusted Cost Basis After Deductions

Once a taxpayer claims deductions from flow through shares, the adjusted cost basis of those shares becomes zero.

This means that when the shares are eventually sold, the entire sale proceeds are treated as a capital gain.

This future tax event must be factored into planning. The immediate deduction provides a strong benefit today, but the gain will eventually be taxed.

Proper timing of the sale can help manage the future capital gain and integrate it into broader tax planning strategies.

Incorporating Flow Through Shares Into Long Term Tax Strategy

Flow through shares can be used to offset high income years, create flexibility for income smoothing, and complement other tax planning tools.

Investors who anticipate unusually high income in a particular year may use flow through shares to reduce their tax burden significantly.

Those planning for retirement may use flow through deductions to free up capital for future investment or to transition into lower tax brackets.

Flow through shares are not a stand alone solution. They work best when integrated with registered accounts, corporate planning, charitable giving strategies, and broader portfolio management.

How Professionals Ensure Proper Compliance

Flow through share deductions require accurate documentation and timing.

Companies must renounce expenses correctly, and investors must ensure that deductions and credits are claimed in the right year.
 

Errors in compliance can lead to disallowed deductions or penalties.
 

Working with tax professionals helps ensure that documentation is complete, expenses are renounced properly, and filing is done in accordance with CRA expectations.

Who Benefits Most From Flow Through Shares

Flow through shares are particularly valuable for individuals who:

• have high taxable income
• anticipate substantial income spikes
• want to support resource sector development
• seek both deductions and credits in the same investment
• understand and can tolerate higher investment risk

These investors receive the greatest tax savings and can integrate flow through shares into larger financial plans effectively.

 

Conclusion

Flow through shares offer one of Canada’s most powerful tax planning opportunities. They provide immediate deductions, generate valuable tax credits, and create long term strategic advantages when managed correctly. While they come with investment risk and future tax considerations, their benefits can be substantial for those who understand the structure and use it intentionally.
 

Integrating flow through shares into a broader tax and investment plan can significantly reduce current year tax liability while supporting long term financial goals.

Tax Partners can assist you in evaluating flow through share investments, understanding the tax implications, and building a strategy that integrates these tools into your overall financial plan.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at info@taxpartners.ca, or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.