Flow-Through Shares: An Untapped Opportunity
In a previous Prosperity Magazine article, we provided some tips on how to recession-proof your small or medium-sized business. One way is to reduce your tax bill to the government. Most people are familiar with certain tax-savings initiatives such as contributing to a Registered Savings Plan (RSP) or a Tax-Free Savings Account (TFSA), or incorporating their business activities.
But there is another tax savings possibility that often flies under the radar—the purchase and sale of flow-through shares (FTS). Although they have been around in Canada since 1954, even many sophisticated high-earners are unaware or unsure of this government sanctioned option.
What is a Flow-Through Share?
Flow-through shares are shares in certain Canadian publicly traded companies. Until recently, they were targeted to companies doing basic drilling and front-end activities in search of new oil and gas resources. More recently, the FTS program has shifted to support similar activities for what are called critical minerals, such as lithium, antimony, gallium, indium and rare earths-minerals used in the manufacture of electric vehicles. To encourage such investments, the Government of Canada offers incentives to the companies which are passed on to the shareholders.
How Do You Buy Flow-through Shares?
Companies operating in the area of mining critical minerals will on occasion offer new shares to help finance their drilling programs. But these offerings are usually time-limited, and because of the tax-savings benefits there is heavy demand.
How are Tax Benefits Generated?
While all Canadians are able to purchase FTS, they are most beneficial from a tax standpoint for individuals with income of $250,000 a year or more because of the higher percentage tax bracket (53%) at that level. The purchaser buys the FTS initially at the company’s offer price (for example $1.50 a share). Immediately the shares are sold to a pre-arranged liquidity provider at a discount (perhaps $1.00 a share). The purchaser can now claim the tax credit on their tax return. If they choose to give some or all of the proceeds to charity they can even claim an additional charitable deduction!
An Example of The Tax Savings
Here is an example of how the math works to reduce income tax.
| Benefit: | By maximizing your potential tax savings for an attractive after-tax return |
| ($251,717) $151,716 | Write a cheque for your flow-through share purchase (initial cash outlay) Net cash-back to investor after immediate sale of flow-through shares to prearranged liquidity provider |
| ($100,001) | Net cash outlay |
| $123,501 | Net tax savings (tax credits & deductions to be included in your income tax return) |
| $23,500 23.5% | Total after-tax return After-Tax Return on a net cash investment of $100,001 |
Too Good to Be True?
Are there any risks associated with an FTS transaction? Because the purchaser does not really have the underlying FTS since it is immediately sold to the pre-arranged liquidity provider, there is no stock market risk.
The only real risk is that the offering company does not follow through and conduct the activities that make it eligible for the FTS credits. While possible, the liquidity providers are well aware of the offering companies’ activities and track records. In addition, companies all carry liability insurance against such an eventuality.
In addition, there is always the possibility that the government of the day may change the tax rules. But this risk is inherent in every area of tax legislation. It is very unlikely that any government would touch the FTS program as currently designed, since the path to carbon zero would be next to impossible without critical minerals.
Taking the Next Step
It is important to understand how the FTS program works, and how you can benefit by reducing your taxes. If you earn at least $250,000 a year or expect to—contact the advisors at TAAG who can provide you with a more in-depth presentation about FTS tailored to your particular situation. TAAG advisors can be reached at (613)234-6006 or reception@taag.ca.
Published by TAAG Corporation
© 2022 TAAG Corporation
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