By June 29 2017
Tax Law

Flow-Through Shares

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While flow-through shares have many benefits to investors and companies in the resource sector, investors should be wary of unique pitfalls to flow-through shares.

The Good

Flow-through shares are “incentive” legislation designed to help junior corporations (public or private) in the resource sector attract equity investment by transferring tax attributes to the investor.

Flow-through shares allow a “principal-business corporation” to renounce Canadian Exploration Expenses (“CEE”) and Canadian Development Expense (“CDE”) that it could otherwise claim, and pass them to its shareholders. This is attractive for resource companies that are not yet profitable, as they benefit by receiving funds to finance their exploration and development activities while the shareholders can claim the CDE/CEE deductions as if they had incurred them directly.

The Bad

Special “Look Back” rules allow an investor to deduct expenses in a year, even though the company will not incur actual the expenditures until the following year. In other words, it permits the company to back-date the expenses so that the investor can claim a deduction in the year before the expenses will be incurred.

If the expenditures are not incurred, however, the investor’s deduction will be denied (though the investor can receive some interest relief). To make matters worse the company will still have to pay Part XII.6 tax (which is essentially an interest charge intended to compensate the government for allowing investors to deduct expenses before they are actually incurred).

The Ugly

While the subscription agreement will typically contain an indemnity clause, this clause will have little effect if the company issuing the flow-through shares goes into receivership. The investor’s claims will rank behind debt claims.

Further, since the adjusted cost base of a flow-through share to the investor is deemed to be nil, the investor is left without the ability to claim a capital loss on the shares and little recourse in the event of bankruptcy.


One potential solution for certain investors is to gift the flow-through shares to a charity. The charity will then sell the shares to liquidity provider (typically institutional and/or offshore investors). This type of transaction has been endorsed by the Canada Revenue Agency.

The charity benefits by receiving proceeds from the sale. The resource company benefits from raising funds. The institutional and/or offshore investors benefit by investing in a company they may otherwise not have access to. And the initial investor benefits by receiving certain benefits of the flow-through shares (the CEE/CDE deduction) and increased tax-efficiency (though additional tax credits and deductions), without being subject to the risk associated with the underlying shares.

Invitation for Discussion:

If you would like to discuss this article in greater detail, or any other business or tax law matter, please do not hesitate to contact one of the lawyers in the tax group at Nerland Lindsey LLP.


Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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