How Flow Through Shares Work

One of the more interesting Canadian-specific investment tax strategies available is flow through shares.  I’ve written several articles over the years on how flow through shares work, what they are, their associated advantages.  As I began to update my knowledge on these unique investment tools, I decided to combine the piecemeal articles that I had written into one catch-all guide to flow through shares.

Overall, I think the most important takeaway when it comes to flow through shares is that they should really only be considered by people who are in high tax brackets and who really understand how risk and investing go together on an advanced level OR people who wish to donate in a very tax efficient manner.  Thoroughly understanding just how risky your flow through shares are, as well as your personal risk tolerance, are prerequisites for being successful in this field.

What Are Flow Through Shares?

A flow through share (FTS) is a share that has been issued by mining, oil, gas, or energy conservation company in Canada to help finance project development. Essentially, by using flow through shares, the corporation is able to transfer its expenses to the investor. 

The reason the government and industry got together to create these unique entities is that both groups wanted to create an incentive to invest in risky resource projects.  Many of these projects will fail to produce any returns for their investors; however, the ones that succeed are often very, very successful – and are of great benefit to the broader Canadian economy.  So, basically the government wants to incentivize Canadians to risk their money by giving them a significant tax break for doing so.

What Are the Tax Advantages of Flow Through Shares?

The main reason why investors in Canada would want to purchase flow through shares is to get a tax break. They can be very beneficial if you are in a higher tax bracket. 

For example, if you were to invest $10,000 in flow through shares, providing that they are eligible for the tax breaks, you can claim the full $10,000 on your tax return. If you are in the 40% tax bracket, that would equate to a $4,000 tax return for that year.

As you can see, this can be quite advantageous to help cut down on your taxes.  It’s essentially an automatic 10% return on your investment. 

Using Flow Through Shares to Maximize Charitable Donations

Another way to use flow through shares to your advantage is to make them work for you by maximizing your charitable donations. Financial Planner Carrey Vandenberg helped us out by explaining how this all works:

If you give to charity or church on a regular or substantial basis ($5,000 or more per year) the following is something that you should seriously consider to replace your current mode of giving, namely writing a cheque and only getting the donation tax credit. Using this strategy will still put the same amount of cash in the hands of your designated charity or church, however, it can cost you a lot less.

First, I must state at the outset that the tax savings do depend on your province of residence, your marginal tax rate, your advisor, and what investment that you ultimately use for this purpose. That will be between you and your Financial Advisor.

What I call the “Double Dip Donation Strategy” starts with the investment in a “Super Flow Through Share” offering. This can save you up to $6,180 on a minimum $10,000 investment. In other words, you are only out of pocket approximately $3,800.

Flow through shares are nothing new. They have been a huge part of the Canadian economy for over 50 years, longer than RRSP’s. However, unlike RRSP contributions you must make a flow through share investment before December 31st to have the tax deductions and credits apply to the current tax year.

If you simply want the tax savings and hold the investment for yourself then you can stop there. You will have made a $10,000 investment for a net cost of only $3,820. If you choose to take a second step and use your investment as a charitable donation you will save up to an additional $4,370.  The $6,180 tax savings for investing and then $4,370 tax savings for donating.

For the donation part, however, you will have to wait for the flow through shares to convert to a mutual fund. It is at this time you can gift the shares to the charity and they can be simultaneously sold for cash by the charity.

In other words, you have received just over $10,000 back in tax savings and the charity or church you have given to has received $10,000 in cash. This of course assumes that the flow through share offering you have participated in is worth the same amount.

For a regular giver to a charitable cause or church, this is considerably better than simply donating cash which produces a total tax savings of only $4,370.

I use the “Super Flow Through Share Donation Strategy” myself and will continue to do so for years to follow or until the government changes the tax rules. Multiply the tax savings by the number of years you will have breath and we are talking potentially hundreds of thousands of dollars in extra dollars for your (or your kids).

Note: The above tax-saving figures are based on the highest tax bracket in BC ($123,000+ of taxable income). The tax savings are still very compelling at the over $70,000 taxable income level and can still be attractive for taxable incomes over $38,000.

Editor’s Note: Flow through shares are very volatile with a very high probability of decreasing in value.

Disclaimer:  Carey Vandenberg is a Financial Planner with Partners In Planning Financial Services Ltd (PIPFS). The views expressed have not been endorsed by PIPFS. The information contained does not constitute an offer or solicitation to buy or sell any investment fund, security or other product or service. This is not intended to provide specific financial, investment, tax, legal or accounting advice for you, and should not be relied upon in that regard. You should not act or rely on the information without seeking the advice of a professional.

How Do Flow Through Shares Work?

Anyone can invest in flow through shares, however, the corporation that issues the flow through shares must be a principal-business corporation (PBC). There needs to be a written flow through share agreement between the corporation selling the shares and the individual (or corporation) who is investing. Once everything is set, the corporation’s eligible expenses will then ‘flow through’ to the original investors. 

As stated above, the investor gets to claim the FULL amount invested against their income. After a couple of years, these shares roll over to a mutual fund which you can choose to sell at any time. When you do decide to sell, the adjusted cost base (ACB) is set to $0, ie. whatever you sell it for is your PROFIT.

So, if you were to invest $10,000, and sell 2 years later for $10,000, your profit would be considered $10,000. So to calculate your capital gains, with a 40% tax rate, would be $5000 x 40% = $2000 tax payable. Even in the scenario where the shares don’t change in price, you will receive a $2000 gain ($4000 tax return – $2000 tax payable).

Who Should Buy Flow Through Shares?

Technically speaking, anyone can buy flow-through shares. However, as the incentive is to offset your taxes, it works best for individuals who are in the highest tax brackets in Canada.

That being said, from an investing point of view, expert sources have said that flow through shares should not exceed 10%-15% of your portfolio.  I personally have dabbled in flow through shares, but have decided that long-term, the juice just isn’t worth the squeeze for me; consequently, I don’t currently possess any flow through shares in my portfolio.

How Does One Buy Flow Through Shares?

Flow through shares can be purchased directly from companies offering them, through mutual fund firms, and even from your local financial advisor. (Check out our Canadian online stock broker comparison.)  They tend to be sold at certain times of the year and are generally sold at a premium. 

Find the best place to buy flow through shares online

View our detailed Canadian broker analysis

What are the Risks/Disadvantages of Flow Through Shares?

While flow through shares can absolutely be beneficial for your taxes, there are some risks and disadvantages associated with them as well:

  • If you are experienced with the Canadian mining/oil sector, you will know that this market can be fairly volatile. Also, when you purchase flow through shares, you typically have to hold onto them for 18-24 months before you can sell them.
  • As mentioned above, flow through shares usually sell at a premium.
  • You can lose up to a certain percentage of your investment, and STILL come out even due to the tax breaks. Below is a table from QIS Capital outlining the loss limits by tax bracket:

50% tax bracket – 66% of the original investment

40% tax bracket – 75% of the original investment

30% tax bracket – 81% of the original investment

20% tax bracket – 89% of the original investment

  • Flow through shares have a holding period of about 2 years which means it is impossible to get your money out before then.  

Flow Through Share Example

Editor’s Note: This example is now quite far in the rearview mirror, but I thought it was illustrative of how one might approach the flow through shares market.  I should also point out once again, that this is not a strategy that I recommend for the average Canadian investor. 

A reader, “Chewy” has left a comment on the research that he has done in the field, and he has come up with a list of his favorite mutual funds that hold flow through investment vehicles.

To briefly summarize, here are the top 3 picks based on “Chewy’s” research:

  1. CMP Resource LP
  2. Canada Dominion Resource LP
  3. Mavrix Explorer LP

Below is his comment:

I too have been doing a lot of research on flow through shares. I made some interesting finds.

I created a spreadsheet and tried to compare the management, performance, and expenses of these limited partnerships (LP’s). I was able to compare the prospects of 10 LP’s that I downloaded from TD’s Webbroker Initial Offerings site.

The problem I found is that when these LP’s record their performance they always use after tax dollars. So I compared their closing net asset value per unit at the time of rollover to their original unit price. I also looked at the number of years that the LP had offerings and the number of times that net asset value per unit was greater than the original unit price.

What I found is that out of the 10 LP’s I compared, only 3 LP’s had a net asset value per unit that was greater than the original unit price before the tax deductions on an offering over offering basis. Some of them, like Sentry Select NCE LP’s only had 1 out of 17 offerings that had been positive. Creststreet LP had 2 out of 10 offerings that were positive. 2 LP’s that you might want to think twice about, before giving them your money.

There were 2 that stood out from the rest. CMP Resource LP and Canada Dominion Resource LP are by far the best when comparing performance, expenses and management. Both of these LP’s are now owned by DMP Ltd. Both are also managed by Dynamic Funds which is also owned by DMP Ltd.

CMP Resource LP has the best performance record. They had 9 out of 10 offerings that had been positive. Their offerings are normally $1,000 per unit with a minimum of $5,000 buy in, but their average asset value per unit on those 10 offerings was $1,242.74. That works out to be a 24% return on your money before taxes. I calculated their average after-tax rate of return on transfer date to be 95%.

Canada Dominion Resource LP would be my second choice based on their consistency and management. They had 11 out of 16 offerings that had been positive. They are also owned and managed by the same companies as CMP. Dynamic Funds is listed as a top performer on TD’s Webbroker Fund Selector, and they have one a number of Lipper Awards for Consistency and Performance.

My Third Choice would be Mavrix Explorer LP. They had 5 out of 9 offerings that were positive. They are in the lower half of the group in expenses.

It’s important to realize that if you are investing in one of these LP’s, you are most likely going to lose money. But with the tax deductions you may come out ahead. If you are not comfortable with the risk, then I would say, just pay your tax bill.

Never invest in something just because you are looking for a tax deduction. You should only invest in something that makes sense to you and that you have a good chance that you are going to make money.

Summary

I’m no flow through share expert, and while this article explains the basics there is a lot more to learn on the subject before making any investments, so please continue with due diligence. If you do decide to pursue this option, you can take a look at these discount brokers in Canada that may hold flow through shares. Just make sure to contact them first to confirm.

Find the best place to buy flow through shares online

View our detailed Canadian broker analysis

FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Canadian Capitalist
13 years ago

I researched these investments a few years back (before starting the blog) and I think this is a great topic for discussion. I’ll post my thoughts next week.

Canadian Capitalist » This and That
13 years ago

[…] Million Dollar Journey posted a primer on saving taxes using flow-through shares. […]

Everyday Weekender
13 years ago

thanks for the great post!.. I’ll have really consider flow through shares this year ;)

Q Cash
13 years ago

I had a very positive experience the first time I used flow through shares. I had maxed out my RRSPs and was looking for another deduction.

I bought into Mavrix Funds flow through shares. I invested $25,000, received $25,000 deduction (althought there is a carry forward of about 10% you have to claim as income the following year). Over the past two years, the fund grew 40% (good timing and all that) and my flow through shares were rolled over into Mavrix’s multiclass series shares this past March 9.

Now they are quite liquid and when the time comes to sell, I have to treat the entire amount as capital gains. Great savings for me especially now with my reduced income in retirement, my tax savings has been huge.

WARNING: We hit at the right time. There is the possibility for commodities to fall, but with China and India going gang busters, I think the commodity market has some life in it yet.

$Q.02

Everyday Weekender
13 years ago

thanks for the additional info QCash.

I think i have so much to learn ;)

Q Cash
13 years ago

FT

I found this through my “financial advisor”. I had done some research on flow through shares and asked for some more information.

I liked Mavrix’s approach, because the shares become liquid after 2 years (actually in my case it was 18 months Sep 05 – Mar 07)

There were no fees (that I saw, I am sure there were at the other end).

All in all it was a good investment for me at that time. I am considering doing it again to offset some capital gains tax I might have to pay this year, but I am waiting to see what the Tories say in their budget this afternoon about capital gains.

Q

Canadian Capitalist » Comment on Flow-Through Funds
13 years ago

[…] Million Dollar Journey recently posted a primer on using flow-through funds for saving on income taxes (You may also want to check out this excellent report from BMO Nesbitt Burns on Flow-Through Limited Partnerships). Some years back, I researched these investments in depth because I received a hefty severance package and was looking for ways to save tax on the one-time boost in income. Looking back at my notes, I decided against them for the following reasons: […]

Chewy
13 years ago

I too have been doing a lot of research on Flow Through Shares. I made some interesting finds.

I created a spreadsheet and tried to compare the Management, Preformance, and Expenses of these Limited Partnerships (LP’s). I was able to compare the Prospectus of 10 LP’s that I downloaded from TD’s Webbroker Initial Offerings site.

The problem I found is that when these LP’s record their preformance they always use after tax dollars. So I compared their Closing Net Asset Value Per Unit at the time of rollover to their Original Unit price. I also looked at the number of years that the LP had Offerings and the number of times that Net Asset Value per Unit was greater than the Original Unit Price.

What I found is that out of the 10 LP’s I compared, only 3 LP’s had a Net Asset Value per Unit that was greater than the Original Unit Price before the tax deductions on a offering over offering basis. Some of them, like Sentry Select NCE LP’s only had 1 out of 17 offerings that had been positive. Creststreet LP had 2 out of 10 offerings that were positve. 2 LP’s that you might want to think twice about, before giving them your money.

There were 2 that stood out from the rest. CMP Resource LP and Canada Dominion Resource LP are by far the best when comparing Preformance, Expenses and Management. Both of these LP’s are now owned by DMP Ltd. Both are also managed buy Dynamic Funds which is also owned by DMP Ltd.

CMP Resource LP has the best preformance record. They had 9 out of 10 offerings that had been positive. Their Offerings are normally $1000 per Unit with a minimum of $5000 buy in. But their Average Asset Value per Unit on those 10 offerings was $1242.74. That works out to be a 24% return on your money before taxes. I calculated their Average After-Tax Rate of Return on Transfer Date ends up being 95%.

Canada Dominion Resource LP would be my second choice based on their consistancy and management. They had 11 out of 16 offerings that had been positive. They are also owned and managed buy the same companies as CMP. Dynamic Funds is listed as a top preformer on TD’s Webbroker Fund Selector, and they have one a number of Lipper Awards for Consistancy and Preformance.

My Third Choice would be Mavrix Explorer LP. They had 5 out 9 offerings that were positive. They are in the lower half of the group in Expenses.

It’s important to realize that if you are investing in one of these LP’s, you are most likey going to lose money. But with the Tax deductions you may come out ahead. If you are not comfortable with the risk, then I would say, just pay your tax bill.

Never Invest in something just because you are looking for a tax deduction. You should only Invest in something that makes sense to you and that you have a good chance that you are going to make money.

Cybrarian
13 years ago

Excellent research work, Chewy. Thanks very much for posting your findings and analysis. Extremely useful info and helpful advice.

Flow Through Share Examples! - Million Dollar Journey
13 years ago

[…] June FrugalTrader05:00 am1 Comment In my article “How Flow Through Shares Work“, I didn’t give many examples of actual flow through shares or mutual funds that hold them. […]

Doug Ransom
13 years ago

I provide commentary on available flow through shares and limited partnership. Subscribe at http://www.dougransom.com/request.information.html

Reader Mail: How can the bread winner reduce taxes? | Million Dollar Journey
13 years ago

[…] you get more comfortable with investing, consider investing a small portion of your portfolio in Flow Through Shares.  Here is another article on Flow Through Share […]

Best of Million Dollar Journey: 2007 Edition | Million Dollar Journey
12 years ago

[…] How Flow Through Shares Work […]

Zahid Jafry
12 years ago

Full-service advisors have acknowledged that flow-through shares pay advisors at least a 4% commission. Quite whopping compared to the commissions paid out on other investment products. While we would hope not, this could provide ample incentive for an advisor to pursue this investment choice over others.

Be weary of an investment product of such a high risk. So high, in fact, that the government is willing to write it off fully, as it would a donation to a registered charity. Same write-off…but you’re not donating your money…you’re investing it.

‘Z’

Richard Nash
12 years ago

I really enjoyed Chewy’s contribution and would like to get in contact with him or to buy him (or her) lunch. I have no idea if direct contact through this blog is allowed, but if it is, please pass my contact e-mail on to Chewy – I’d love to hear back.
Thanks

JR
12 years ago

Been doing flow throughs for a very longggg time, & dont LP’s anymore.

I have had good and bad experiences, timing is everything and brokers (who I dislike) flog what is best for them.

There is a risk to flow throughs in that will you get thetax credits but you ‘MAY’ be a winner after they mature, with the possible rollover to an RRSP for a second tax deduction.

The only ones (narrow minded me) that I have been doing that provides me with any success for the past several years is the Mineral Fields Super Flow Throughs (SFTS), direct, no fees, no broker charges, minimum $10k lots

There are huge tax savings depending on which province it is that you live in, for me its Ontario, and from experience I have found that Mineral fields (MF) generally do not to mature theirs in the same tax year.

For example, if you were to purchase in April this year they would unlikely mature till 12-18 months.

From experience, the last ones I did that matured, I bought in December 2006, matured in 10-months at 120% of the intial cost, because MF trys to mature them as early as 6-months once they are over the $10k purchase lot price, but not within the same tax year. Once the MF’s mature you have a choice tax free to roll over to their mutual funds, tax free growing till you withdraw.

I currently have $60k in SFTS that will mature this tax year which I shall simply rollover and buy again.

For those that go the SFTS, you have to watch the fed’s, since the budget keeps letting then continue just year on year.

SFTS give me the tax return plus the tax credits, also benefitting from deducting the interest to purchase them.

There is a recapture on the capital gains and CEE in year two, but generally I net a nice positive ROI on this type of investment strategy when I combine this with a double bang RRSP (50/50 in out in the same tax year) to get as much of the tax back that is taken from my wages at source. This year (just filed 2007)it will be as close to every penny back, since my tax at source was $26K. The goal is to get back as much income tax back that you paid at source, thus the bonus allows you to do whatever with it.

With the SFTS, this is outside of other passive incomes in a numbered company.

JMul
12 years ago

Hi there,

I know that a lot of people will roll over the gains from flow-through into a charity and this gives a little more bang on your buck and is great for a legitimate charity too. But what about rolling the gains into the RRSP?

What is recommended?

Thanks

Cannon_fodder
12 years ago

In this link http://www.investmentexecutive.com/client/en/News/DetailNews.asp?id=38241&IdSection=23&cat=23&BImageCI=1

they mention that tax credits can be carried back 3 years. Is this for the additional SFTS tax credit or any FTS offering? The reason I ask is that for the first time in many years I have to pay additional tax for 2007 and in 2008 I expect to move into a slightly lower tax bracket. If I can make an investment in 2008 that will allow me to get a bigger refund by applying it 2007 vs. 2008 I’m all for it.

paulette
12 years ago

This is a good investment to make. Imagine of doubling it just for a matter of 2 years isn’t bad at all.

JR
12 years ago

Cannon:

My reason for doing SFTS is the tax benefit (100% write off + the fed & prov tax credit) and any rollovers to RRSP, Mutfunds or reinvestment into another SFTS.

Mineral Fields is the one that I chose. It generally gives back on maturity not less than 100% of the initial investment, at least the ones that I have done.

The general idea with SFTS is on maturity of the particular fund you invested in, is that you take you could take the proceeds with further options.

i) you’d pay captial gain, which is approximately equal to the Prov & fed tax credits) leaving you with a gain of whatever tax you got back.

ii) Reinvest the money into another SFTS

iii) Put it into an RRSP and some into a TFSA

In the case of MF, it has the option on maturity to roll over to their mutual funds with zero tax and capital gains tax. This gives the benefit of further growth. Then should you want to redeem (part or whole) at that point tax is payable. But what you could do I suppose on redemption out of the mutual fund is make that a deposit into an RRSP.

Past practice is that SFTS keep getting approved in the Governments spring budget, with the current ones approved to March 2009

Donate your worthless stocks to charity and get tax credits « oceanflynn @ Digg
12 years ago

[…] “How flow through shares work.” Posted by Maureen Flynn-Burhoe Filed in Measuring Money, Policy Development, Public Policy, Risk Management, Risk Society, UHNW, moral mathematics, policy research, wealth disparities in OECD Tags: Canadian development expenses (CDE), Canadian exploration expenses (CEE), charities at-risk of sanctions, flow-through shares, revocation of charitable status […]

Financiallyenhanced
12 years ago

Flow Through Shares seem to be a great option to boot your tax returns depending on the profits you make.

After reading your post the idea of purchasing some flow through shares has come to mind. They may not create huge profits but every bit counts especially when you are saving for something big.

I wonder how well they will go compared to the normal shares. Whether they are relatively secure like long-term shares in businesses.

Difference between long-term and short-term shares:
http://www.financiallyenhanced.com/2008/07/01/difference-between-long-term-and-short-term-shares/

Ole
11 years ago

Just computed some scenarios for a BC resident using FTS or “Super-FTS”
http://www.flow-throughshares.com/i/flowthroughbrochure.pdf
I made my own excel sheet and changed the values for marginal rates.
Afterwards I made another row with “Value on redemption”, then “Less taxes” and net realized value. Take the net realized value – Invested value after tax credits. Divide this by the same Invested value after tax credits and If the FTS were worth the same as when you invested in them and you redeem after 2 years, you get 47.06% return (21.27 per year) regardless of tax bracket.

Seems to me that you get exactly the same rate of return whether you’re in a high or a low bracket. Exactly to the dot.

Ole
11 years ago

Oh I realize now… It comes down to the fact that capital gains are taxed at 50%…
As a BC resident in highest bracket you break even at about 50% in value loss of the shares, 100% ROI if the shares remain at the same value.
For low income earner I get break even at 40% loss and 65% ROI if the shares remain at the same value.
This is for super flow through shares.

Carl Brodie
11 years ago

How many other options are there like flow through shares?

As Junior Miners Cash in on Soaring Inflation and Growing Global Demand, So Can You
11 years ago

[…] individual investors, there are attractive incentives in place.  Canadians benefit from “flow-through” shares, allowing those investors write off (against income) all of the acquisition costs in certain […]

tripleBottomLine
10 years ago

I have some personal ethical reservations with investing in oil and mining operations. Is anyone aware of renewable energy investments that benefit through flow through shares?

James
10 years ago

Sorry, I didnt get the part why you would use $5000 times 40% to calculate your payable tax? I thought the entire $10000 is profit, shouldnt you be using $10000 as your taxable income? Thanks

Thicken My Wallet » Blog Archive » Do you ever talk to your accountant about your investments?
10 years ago

[…] return bonds, but tax efficiency requires a much more individualized solution than purchasing a flow through shares or other tax friendly […]

Dwayne
10 years ago

You have neglected to mention a very important fact about “Flow Through Shares”. They should be called “Business Loss Flow Through Shares” but that name doesn’t look good on marketing material.

Expoloration companies spend a lot of money looking for oil, gas and minerals. They have huge expenses and no revenue unless they hit the mother load. The “investors” in flow through shares get to write off the losses the company incurs against their own income. Sure you get a $4,000 tax benefit on your $10,000 investment but only because the company has lost $10,000.

Sure once in a while an investor makes a killing on flow through shares but most people lose everything other than their $4,000 tax benefit. However, the promotors and financial advisors make money every time.

Terry J
10 years ago

31 James — the reason they used $5,000 instead $10,000 is capital gains tax is only charge on 50% of the profit (at your full marginal rate)

Sushant
9 years ago

The commission, fees and premium value does not make this a viable option..

Nathan
9 years ago

One thing that wasn’t discussed on the tax front that I would like some info about is Marginal Tax Rate. How does the income from the shares affect Marginal Tax Rate (ie, how aggressive are you allowed to go into FTS without setting off a marginal tax rate alarm?) Im not sure exactly how marginal tax rate works so any info would be great, thanks!

Carl
9 years ago

Are you talking about alternative minimum tax?

D. Bruce Smith
8 years ago

Is there someone who reviews the flow throughs that are available in Canada as to who has the best ROI

Matt
7 years ago

Flow through shares are usually a complex subject and I’ve always had trouble understanding them. Your piece on them actually made a ton of sense. Thanks for clarifying what flow through shares are so well. I had a couple junior minor positions on the venture last year and one of them issued a news release talking all about flow through but it went right over my head. Regardless, the stock headed south in a hurry and I got out.

InvestAsian
6 years ago

Thanks for another great article! I’m doing some research in flow through shares, and may invest later in the summer when I think stock prices may go down.