Give More For Less [Flow-through share financing] – by Lisa G. Davis ( – October 16, 2012)

 Lisa G. Davis, LL.B, ICD.D, is head of the legal and operations teams for Toronto based PearTree Financial Services Inc.

Advisors should beware of tax-shelter offerings that either have no underlying business purpose or are based on schemes so aggressive that reassessment is a foregone conclusion.

But done right, flow-through share financing lets major charitable donors minimize taxes while maximizing giving.


When resource companies prospect, they rarely find an ore body of sufficient value to warrant the building of a mine. Under the flow-through tax regime, a mining company or oil and gas explorer can issue new shares to finance new or future exploration activity as specifically defined in the Income Tax Act.

Under the flow-through-share subscription agreement, the company agrees for its tax deduction to benefit the investors who fund that future exploration. There are many safeguards built into the flow-through system to ensure balance and to limit fundraising to what is actually needed for exploration over the 12-to-23 months post funding. There is also a natural end to the availability of this structure.

If a resource company goes into production, it will typically stop issuing flow-through shares, since it then needs the tax deductions as an expense against its own revenue. Many studies demonstrate this bilateral financing method is economically beneficial, even though, as expected, the underlying shares don’t often increase in value.

An investment in flow-through shares meets the tax-shelter formula of deductions equal to or greater than the cost of the investment within four years. So, the Income Tax Act exempts direct investment in flow-through shares from the tax-shelter reporting rules. However, most flow-through investments are now made through limited partnerships (LP) classified and marketed as tax shelters.

Typically, donors of flow-through shares can expect to see their after-tax cost of giving go from about 50 cents per dollar of donation down to around 15 to 20 cents in most provinces except Quebec, where the cost of giving is under 10 cents due to the robust tax enhancements available.

The process begins with the donor subscribing for flow-through shares, thereby accessing the associated Canadian Exploration Expense (CEE) and investment tax credit benefits. The next step is for the donor to gift the shares to their chosen charity.

The charity then sells the shares to an institutional investor, (arranged through a flow-through financing specialist firm) to receive their funds. Then, the charity issues a deductible tax receipt to the original donor. Because all three steps must take place or the transaction cannot be completed, all funds are held in escrow until the completion of the transaction. In the event the transaction is not completed for any reason, all funds are returned to the donor.

All parties are at arm’s length to one another. The charity simply issues a tax receipt equal to what it actually receives in cash on the closing of the transaction, representing the fair market value of the involved shares.

Where a subscriber invests one dollar in a mining exploration flow-through share offering and receives a one-dollar tax deduction (reducing his or her after-tax investment risk to about 50 cents), the mining company spends one dollar on taxable activities, made up mainly of labour in rural Canada.

So, the fiscal authority may lose tax revenue in Montreal or Toronto, but it gains the amount back in tax revenue from projects in Val d’Or or Timmins.

Similarly, if that same flow-through investor donates the shares to charity and receives a tax receipt for the sale proceeds received by the charity immediately following the donation, the after-tax cost of the donation is further reduced.

In the end, the participants do not engage in a flow-through share donation arrangement to make money. They simply want to reduce the after-tax cost of their philanthropy.