Canada is the second largest country in the world and has immense natural resources wealth. The natural resources development business involves technology, capital, and expertise to find and develop deposits that include gold, silver, copper, cobalt, zinc, nickel, iron, oil and natural gas. This business has both risk and reward as it is often difficult to identify the next big discovery in remote parts of Canada.
As we know An economic discovery can create significant new wealth both for investors and Canada. The Flow Through Share (FTS) structure was developed by the federal and provincial governments to provide a way to allow investors to efficiently invest in exploration projects. It often takes up to ten years to drill and identify economic deposits, build a mine, commence production and produce taxable earnings. Flow through shares allow investors to immediately use the tax pool deductions that are generated by eligible exploration programs.
Flow Through Shares are typically issued by a smaller company that has identified an exploration target the shows promise of an economic deposit. For hard rock minerals such as gold or copper, the primary way to identify the size and grade of deposits is by drilling multiple holes and analyzing the results for the width and grades of the mineralized zone. This information is then geo-spatially analyzed to build models to estimate the amount of potential metal that can be recovered. It may take multiple drilling programs to correctly analyse the ore deposit. Each of these drilling programs can be eligible for flow-though share deductions.
Flow Through Shares are a special issue of common shares where the tax deductions are issued to the original investors and then become regular common shares after the tax deduction is completed. Corporations that issue FTS typically generate Canadian Exploration Expense (CEE) which is a 100% deduction against income. The Federal Government also provides a Mineral Exploration Tax Credits (METC) of 15% with certain provinces also providing additional tax credits of 3% to 20%.
The net result of the various FTS tax deductions and tax credits, is the after-tax cost of $1000 Investment in FTS can range from $295 to $472 at the highest marginal tax rates in different provinces and territories. This is illustrated by the chart below that is found at the federal government’s Natural Resources Canada website. Flow through shares are subject to capital gains tax upon sale and have a zero cost base so additional taxes are payable upon disposition.
For many Canadians with high taxable income, FTS are a useful way to invest in the Canadian natural resource development business. There are different strategies that range from selecting individual companies to investing in diversified limited partnership portfolios. These FTS investments can be combined with certain charitable deduction strategies that significantly reduce the after-tax cost of supporting your favourite cause.
FTS are investing in higher risk exploration projects and should only be considered if they are appropriate for an individual’s risk profile. It is often useful to seek the advice of a tax advisor to confirm individual tax strategies.