Flow-Through Financing 101

Flow-through shares:

The Canadian Flow-Through Share tax regime was established in the 1970s to promote exploration investment in Canada. Resource issuers can “flow-through” or “renounce” the tax deductions associated with certain exploration expenditures conducted on Canadian resource properties to the first subscribers of these common shares, thereby incentivizing individual investors to finance early-stage mineral exploration and helping junior mineral exploration companies raise capital.

• A Flow-Through Share (“FTS”) is a type of common share that permits the initial purchaser to claim a tax deduction equal to the amount invested.
• The flow-through share regime allows public companies to transfer to investors certain exploration expenditures conducted on Canadian soil.
• Flow-through share financing contributes over 65% of the funds raised on Canadian stock exchanges for exploration across the country, generating significant exploration activity within Canadian borders.

Source: PDAC – for more detailed analysis Visit the PDAC website

Certain corporations in the mining and renewable energy and energy conservation sectors may issue Flow-Through Shares to help finance their exploration and project development activities (oil, gas and coal exploration and development activities were removed from the FTS regime effective March 31, 2023). The FTS 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 FTS 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 Canadian Flow-Through Share tax regime has been part of the Canadian Income Tax Code since the 1970s.
• The Canadian Revenue Agency (“CRA”) and Revenu Québec have issued Advance Tax Rulings confirming the tax consequences of Oberon’s Charity Flow-Through ("CFT") Financing model.
• Neither the CRA or Revenu Québec has challenged Oberon’s CFT financings in the last 15 years with over 400 financings and thousands of client tax returns.
• There exists a limited, but controlled risk that an issuer does not correctly spend and renounce qualifying Canadian Exploration Expenditures (“CEE”) or Canadian Development Expenditures (“CDE”). Oberon protects clients through an indemnity provided by the issuer and has never had a client lose the subscribed tax benefits.
• There is no equity price risk for the donor or charity given the common shares are sold at closing. If the sale were not consummated the transaction would be canceled and subscription funds returned to the subscriber.

• Depending on your province of residence, you may be subject to tax at a rate of 50% or higher when your income exceeds CAD$245,000. Acquiring flow-through shares is one potential tax minimization strategy. Flow-Through Share investments help you reduce your taxable income and thus reduce your tax liability.

• Alternative Minimum Tax (AMT) is a feature of the Canadian Income Tax Act that places a floor on the percentage of taxes that a filer must pay to the government, no matter how many deductions or credits the filer may claim.
• Proposed amendments to the AMT regime for high-income individuals were introduced in the 2023 federal budget, effective for taxation years beginning 2024. On 4 August 2023, draft legislative proposals to implement these changes were released and various concerns were identified by stakeholders with respect to certain amendments during the consultation period. It is our understanding that the draft legislative proposals remain under development since they were not included in Bill C‑59, Fall Economic Statement Implementation Act, 2023, which was tabled on 30 November 2023. To date, the government has not provided additional information about the amendments or whether any comments received during the consultation period will be incorporated into subsequent draft legislative proposals.
• Broadly speaking, the proposed amendments expand the AMT base by further limiting tax preference items, increase the basic exemption amount and the AMT rate, and extend eligibility for the general AMT exemption to additional types of trusts.