The Advantages and Purpose of Flow-Through Shares

The mineral resources of a nation is one of the most valuable assets they have in the current world of globalization and constant development.

This guide is intended as a general summary of the current legal requirements in connection with the private placement of securities or ‘flow-through shares’ issued by mineral exploration companies in Canada and is not legal or investment advice. Please consult your investment advisor to determine eligibility for participation in private placements for Canadian mineral exploration companies. For more information on the private placement process, please read our previous blog ‘The Money Behind Mineral Exploration and Development in Canada’.

**Definitions and list of sources for reference at bottom of page**

There is a little-known way for Canadians to reduce their taxable income and additionally gain tax credits by investing in Canadian-based companies focused on the exploration and development of natural resources. The objective of this blog is for the reader to leave with a sound understanding of these tax advantages that are available when investing in mineral exploration and development via ‘Flow-Through Shares’ (FTS(s)).

You might be thinking “Pardon? Tax advantages to investing in Canadian mineral exploration companies? How come I’ve never heard of this before?”. Well, a major reason would be that until recently the availability of these tax advantages was largely restricted and the primary individuals that reaped the rewards of FTS had to be designated by Canadian tax law as ‘Accredited Investors’. Also notable is how complex and outdated the Canadian regulations are that outline taxation, this dampens the ability of people to even inquire about tax regulations. For more information on eligibility and why investing in Canadian mineral exploration and development can lead to tax advantages, keep reading.

Two Objectives = One Main Goal

There are two objectives that FTS help to achieve, which ultimately lead into one main goal: build more mines so Canada benefits from the substantial economic gains that derive from mining activities.

Mineral Production by Province
  • Since mineral exploration companies own prospective properties and not producing mines, the companies are often not generating revenue that they can deduct their exploration expenses from. Exploration expenses are significant and run up into the millions of dollars to identify a resource and further define its economic potential. The FTS regime allows for the corporation to renounce and “flow through” eligible exploration and development expenses to the original investor.
  • The Canadian Mineral Exploration and Development industry is one of the most advanced in the world due to this beneficial tax program. The high-risk, speculative nature of investments in junior exploration companies makes attracting equity capital very challenging. The value of any commodity, including minerals is often volatile and sometimes depressed valuations will lead to a lack of investment in the exploration and development of specific minerals. This conundrum ultimately leads to the ‘boom and bust’ cycle which can cause prices of everyday items to skyrocket when demand for an associated mineral outstrips supply and there’s no additional resources immediately available. FTS help mediate this problem by encouraging the exploration and development of a mineral even if said mineral is not currently priced attractively. Canada, also known as the mining capital of the world and the Toronto Stock Venture Exchange consistently outperforms other capital markets in terms of raising the capital needed for mineral projects.

Companies that issue FTS must be Canadian-based while also publicly listed on a Securities Market (including venture exchanges) or more commonly known as ‘Stock Markets’. Being listed on an exchange enables the investor and different levels of government to have confidence in the company as a professional operator due to the stringent rules and regulations most stock markets implement.

The tax credits and reduction of taxable income happen at both the federal and sometimes the provincial level. Only four provinces offer an additional tax credit while the others have no additional tax-related incentive for investors. The federal tax credit is applicable in the entire country of Canada and only Canadian citizens are eligible for the tax advantages associated with FTS. Essentially, what happens is that 100% of the amount that a person invests in FTS can be deducted from their federal taxable income AND the person can receive an additional federal Investment tax credit* (ITC) of 15% of their total investment. This Federal Tax Credit is identified as the ‘Mineral Exploration Tax Credit’ or METC for short, and it is important to mention that whatever amount of tax is credited is considered taxable income in the following year.

The METC is currently in the early stage of a 5-year term and is scheduled for renewal in 2024.

River Valley Extension
An example of a mineral exploration project that would qualify for the use of FTS to fund exploration and development is the River Valley Primary Platinum Group Metals Project, one of the largest of its kind in North America that is 100% owned by New Age Metals.

The amount of the ITC reduces the investor’s taxes owing (not merely taxable income) on a dollar-for-dollar basis. For example, a $15 ITC generated by $100 of renounced Canadian Exploration Expenses* (CEE) eliminates $15 of tax owing by the investor on other income. The federal ITC is non-refundable, meaning that it cannot be used to reduce taxes owing below zero so as to create a refund (any portion not used in the year can be applied in future years).

The provincial tax credits are only applicable to provincial tax owed meaning they are more restrictive and only British Columbia, Manitoba, Ontario and Quebec offer them. To receive the additional tax credits that the four provinces offer, the investor must be a resident of the province AND the money raised from issuing FTS must go towards the exploration activities at a project located within the province. Manitoba has the highest additional tax credit at 30%, while Ontario has the lowest at 5%.

The Government of Canada defines Flow-Through Shares in the following way

Certain corporations in the mining, oil and gas, and renewable energy and energy conservation sectors may issue FTS to help finance their exploration and project development activities. The FTS must be newly issued shares that have the attributes generally attached to common shares.

Junior resource corporations often have difficulty raising capital to finance their exploration and development activities. Moreover, many are in a non-taxable position and do not need to deduct their resource expenses. The FTS mechanism allows the issuer corporation to transfer the resource expenses to the investor. A junior resource corporation, in particular, benefits greatly from FTS financing.

The FTS program provides tax incentives to investors who acquire FTS by allowing:

  • Deductions for resource expenses renounced by eligible corporations; and
  • Investment tax credits for individuals (excluding trusts) on resource expenses in the mining sector that qualify as flow-through mining expenditures.

The Canada Revenue Agency (CRA) reviews all FTS arrangements. Audits are carried out to monitor the program. Individuals, trusts, corporations, and partnerships can invest in FTS, but only the original investors can deduct the amounts renounced to them.

The corporation that issues the FTS must be a principal-business corporation (PBC)*. A holding company whose assets are composed of 90% or more of shares or indebtedness of a related PBC may also qualify as a PBC.

There must be a written FTS agreement between the investor and the corporation. The corporation can then renounce and “flow through” eligible exploration and development expenses to the original investors. The type of expenses a PBC can renounce are:

Canadian exploration expenses (CEEs)*, which are added to the cumulative CEE (CCEE) pool and can be deducted up to the maximum of 100%; or

Canadian development expenses (CDEs)*, which are added to the cumulative CDE (CCDE) pool and can be deducted up to the maximum of 30%.

FTS investors may benefit from:

  • Deductions from income through renounced expenses;
  • An investment tax credit (ITC)* on flow-through mining expenditures for individuals; and
  • Amounts renounced to the partnership, which can be allocated to the partners.

Individuals (excluding trusts) can claim a 15% non-refundable ITC for certain mining CEEs renounced on investments in FTS of mineral exploration companies. Under the “look-back” rule*, funds raised with the benefit of the credit in 2018, for example, can be spent on eligible exploration up to the end of 2019.

Flowthrough Illustration

While normally the amount paid by an investor becomes the cost for tax purposes of the property they acquire, in the case of a FTS the investor is deemed to acquire the FTS at a cost of zero, to take into account the fact that by acquiring the FTS the investor is thereby acquiring CEE/CDE* that is deductible from income. As a result of having a FTS cost of nil for tax purposes, whenever the FTS are sold the investor will generally realize a gain equal to the full amount of the sale price. Since in most cases that gain will be treated as a capital gain (only 50% of which is included in income for tax purposes), it is still quite advantageous to an investor to receive $100 of renounced CEE /CDE that can be used to shelter $100 of other income: the accrued capital gain on the FTS will only be realized if the FTS investor sells the FTS, and even then only half of the capital gain will be included in income.

Am I eligible to purchase Flow-Through Shares?

In Canada we do not have a national regulator, instead securities law is scattered amongst provinces and territories. The system in Canada is referred to as a ‘closed system’ because a security never becomes freely tradeable unless (i) a prospectus is filed to qualify the securities or (ii) if securities are distributed under an exemption (private placements), and enough time has passed for the marketplace to absorb information about the issuer.

  • Sold pursuant to an exemption,
  • Qualified by a prospectus, or
  • Specified resale rules are met.

Private placements are the most common avenue for investing in FTS, and the most commonly used ‘exemptions’ that state eligibility are listed below:

  1. Accredited Investor Exemption;
    • Institutional investors such as banks, insurance companies, credit unions, trust and loan companies, Canadian federal and provincial governments, Canadian municipal governments, Crown corporations, and pension funds regulated by the federal or a provincial pension commission;
    • Dealers and advisers registered in Canada (other than exempt market dealers) automatically qualify as accredited investors;
    • Companies, partnerships, trusts and estates (other than investment funds) with net assets of at least $5,000,000, provided the entity is not created or used solely to purchase or hold securities on that basis;
    • Individuals who own financial assets (excluding a home) having an aggregate net realizable value before taxes in excess of $1,000,000 or who had a net income before taxes of at least $200,000 (or with a spouse, in excess of $300,000) in each of the two most recent years and expect the same income in the current year; and
    • A trust established by an accredited investor for the benefit of the accredited investor’s family members.
  2. Employee Exemption;
    The Employee Exemption is available to facilitate an issuer selling its securities to employees, executive officers, directors or consultants of the issuer or its affiliates without qualifying a prospectus. Securities may also be offered to certain permitted affiliated persons, including spouses, trustees, and registered retirement savings plans of the foregoing. Some issuers use the Employee Exemption to establish directed share programs in Canada. Key to using this exemption is that the trade with the person must be “voluntary”. This means that the trade cannot be induced by expectation of employment or office or continued employment or office. Typically, the issuer will have purchasers execute a certificate to this effect to provide support for relying on the exemption.

  3. Existing Security Holders Exemption;
    This is the most significant exemption for individuals that are not accredited investors and was only added to the suite of exemptions in the last few years, which means general knowledge of it is lacking. An exemption is available to issuers listed on the Toronto Stock Exchange, the TSX Venture Exchange, the Canadian Securities Exchange or the Acqeitas NEO Exchange to distribute securities to their existing shareholders without a prospectus (the “Existing Security Holders Exemption”).

    The Existing Security Holders Exemption is only available to reporting issuers in Canada that are up to date with all disclosure requirements applicable under Canadian securities law. Investment funds are not permitted to rely on the exemption. The offering may only consist of securities of the issuer that are listed on the relevant exchange or a unit consisting of a listed security and a warrant. The issuer must file a news release describing the proposed distribution in reasonable detail. The release must also include a statement confirming that all material facts or changes have been disclosed.

    Purchasers are only permitted to invest an aggregate of $15,000 in any 12-month period using the Existing Security Holders Exemption, unless the security holder has obtained advice regarding the suitability of the investment from a registered investment dealer. The Existing Security Holders Exemption is also subject to a dilution limit – it must not exceed 100% of the securities of the issuer that are outstanding immediately before the offering.

  4. Family, Friends and Business Associates Exemption;
    To qualify for the Family, Friends and Business Associates Exemption a person must be a “close personal friend” of a director, executive officer, founder or control person of the issuer and is an individual who has known the person affiliated with the issuer well enough for a sufficient period of time to be able to assess the person’s capabilities and trustworthiness and to have access to information regarding the investment. The relationship must be direct and it is the responsibility of the person relying on the exemption to ensure the potential purchaser meets the characteristics required under the exemption.

    In Ontario and Saskatchewan, an investor must sign a risk acknowledgement form and disclose, if applicable, the nature of the relationship to the issuer. The risk acknowledgement is not required to be filed but must be retained by the issuer for eight years. Additionally, in Saskatchewan, a slightly broader group of potential purchasers is permitted.

What does the process look like?

A private placement offering for mineral exploration companies is also frequently termed ‘a financing’ because the proceeds are used to fund or ‘finance’ company operations. A financing will consist of the offering of three types of securities which include Flow-Through Shares, Non-Flow Through Shares (NFTS or ‘hard dollars’) and Flow-Through Warrants*. The proceeds from selling FTS absolutely MUST be earmarked for exploration activities that qualify as CEE*, whereas the ‘hard dollars’ can be used for expenses that do not qualify as CEE*. Both the FTS and ‘hard dollars’ are classified as ‘common shares’, which means they are shares that you can easily buy in the open market however in private placements the FTS are almost always sold at a premium to NFTS due to the associated tax advantages. The shares bought via private placement are not legally allowed to be sold by the buyer for at least 4 months.

Also, of significant value and importance is the issuance of Flow-through warrants*. Warrants are often attached to both FTS and NTFS and vary in number issued, however an example of a common Flow-through Warrant* structure is half a warrant per share issued. Warrants sweeten the deal considerably as they provide not an obligation but a right* to purchase shares at a certain price within a predetermined timespan.

Information particular to the designation of funds raised through the private placement process will be found in the written agreement, which is usually a ‘term sheet’. The term sheet outlines the cost of FTS, NTFS and Warrants but also identifies what specific project(s) and associated exploration activities the funds raised from selling FTS will be used to pay for. If an offering of FTS fails because, for example, the expenses incurred by the company issuing the shares did not qualify, the issuing company may be subject to significant liabilities, including an obligation to compensate FTS holders for the loss of promised tax benefits. If the company does not use all of the funds they raise from the sale of FTS by the end of a time period of two years, again the company may be subject to significant liabilities, including an obligation to compensate FTS holders for the loss of promised tax benefits and/or fined by the CRA.

Suppose you hear that a mineral exploration company you’re interested to invest in has announced they are going to have a private placement and you want to participate. The best thing to do first would be to ask a representative to send you the term sheet. See here a link to the tax form you are required to fill out if you want to receive the tax benefits from purchasing FTS, you will see that it is only 2 pages and fairly simple to complete.


Ultimately, the benefits of flow-through shares for both the issuer and investor are substantial and provide incentive for both parties to reap the rewards associated with this method for investment. While initially the process may seem complicated, it is not so and hopefully the information relayed here assists those that are interested in the private placement process and purchasing FTS. It should be undisputed that the mineral resources of a nation such as Canada both indirectly and directly benefit its entire population through the jobs and tax revenue the industry generates. In addition to this macroeconomic activity, the value that can be received from being a Canadian taxpayer and investing in Canadian mineral explorers is not just limited to a potential ‘gold mine’ of return on investments.

With the right guidance, starting with the information located here, Canadian investors in Canadian mineral exploration and development companies can reap the rewards of lowering their taxable income and reducing their taxes owed by purchasing FTS. Investors should always seek the advice of a qualified investment advisor before acting upon what they read online, so ensure you have sought a professional opinion before submitting a subscription agreement for a private placement.


Canadian development expense (CDE)
[Ss. 66.2(5) Definitions] – includes certain expenses for the development of an oil or gas well in Canada, or of a mine in a mineral resource in Canada.

Canadian exploration expense (CEE)
[Ss. 66.1(6) Definitions] – includes certain expenses incurred to determine the existence, location, extent, or quality of a mineral resource or of an accumulation of petroleum or natural gas in Canada. In addition, certain expenses incurred to bring into production a natural accumulation of petroleum or natural gas in Canada, or a new mine in a mineral resource in Canada may also qualify as CEE.

The definition of CEE also includes Canadian renewable and conservation expenses (CRCE).

Canadian exploration and development overhead expense (CEDOE)
[Reg. 1206(1) and (4.2)] – a CEE (excluding CRCE) or a CDE incurred in respect of:

  • administration, management, or financing;
  • salary, wages or other benefits of an employee whose duties are not all or substantially all for exploration and development;
  • maintenance or rental of, or taxes or insurance on, property that is not all, or substantially all, used for exploration or development; or
  • the use of property of, compensation for services of, or acquisition of materials, parts, or supplies from a person connected with the corporation such that the expense is more than the costs incurred by person in respect of such property, services, etc.

CEDOE are excluded from the resource expenses that may be renounced to investors.

Canadian renewable and conservation expense (CRCE)
[Para. 66.1(6)(g.1) of the definition for CEE, Reg. 1219] – includes certain expenses incurred in respect of the development of a project for which it is reasonable to expect that at least half of the capital cost of the depreciable property to be used in the project will be the capital cost of property described in Class 43.1 or 43.2 of Schedule II of the Income Tax Regulations. See Canadian exploration expense.

Date of renunciation
The date that the renunciation is made. The date of renunciation is usually the earlier of:

  • the signing date of the T101A Summary; and
  • the date on which the earliest T101, Statement of Resource Expenses, was delivered to an investor.

This date is relevant to the issuer since it determines the deadline to file T101A forms without penalties. The CRA generally uses the certification date on the T101A Summary as the date of renunciation.

Deemed Canadian exploration expense (DCEE)
[Ss. 66(12.601)] – permits up to $1 million per calendar year of certain specified Canadian development expenses (CDEs) incurred in the oil and gas sector by a principal-business corporation (PBC) whose taxable capital does not exceed $15 million to be renounced as Canadian exploration expenses (CEEs) to the investor.

Effective date of renunciation
[Ss. 66(12.6), 66(12.601), 66(12.61), 66(12.62), and 66(12.63)] – renounced expenses are considered to have been incurred on the effective date of renunciation by the person to whom they are renounced, and never to have been incurred by the corporation. The principal-business corporation (PBC) can choose an effective date of renunciation that allows an investor to claim resource expenses on a date that is earlier than the actual date of renunciation.

For example, if a PBC renounces amounts in March of Year 2 for expenses incurred in Year 1, the corporation may choose to have the effective date of renunciation occur on a date in Year 1, as long as the expenses were incurred on or before the effective date and after the investor and corporation entered into a written agreement. An exception to this requirement is provided in the look-back rule.

Flow-through share (FTS)
[Ss. 66(15) Definitions] – a new share of capital stock of a principal-business corporation (PBC) that is not a prescribed share and that is issued to a person under a flow-through share agreement. An FTS includes the right of a person to have such a share issued. As such, a flow-through warrant (FTW) is considered an FTS.

Flow-through mining expenditure (FTME)
[127(9) Definitions] – available at the rate of 15 per cent of qualifying expenditures to individual investors in respect of “grass roots” mining exploration expenses financed using flow-through shares. Grass roots exploration focuses on finding new resources, as opposed to delineating existing resources.

Flow-through share agreement
[Ss. 66(12.6), 66(12.601), 66(12.62), and 66(15)] – a written agreement entered into between an investor (corporation, partnership, individual, or trust) and the principal-business corporation (PBC), under which the PBC agrees to incur Canadian exploration expenses (CEE) or Canadian development expenses (CDE), the total of which will not be less than the consideration paid to the corporation for the FTS, and to renounce to the investor amounts of CEE or CDE that are not more than the consideration. These qualifying expenditures must then be incurred within 24 months following the month in which the agreement was entered into.

The consideration to be received must either be stated in the agreement, or determinable within 60 days of the agreement date.

Flow-through warrant)(FTW)
An option to acquire a flow-through share (FTS) which is a right to have such a share issued (other than a prescribed share). If consideration is received for the option, and the corporation agrees to incur eligible expenses and to renounce them, then the qualifying period starts on the agreement date for that consideration. When the option is exercised, the qualifying period for the exercise of the option starts on the date the option was exercised.

A “prescribed right” is defined in subsections 6202.1(1.1) and (2.1). These subsections ensure that restrictions on the type of shares that may qualify as flow-through shares currently found in subsections 6202.1(1) and (2) also apply to rights to acquire shares.

Grass roots mining expenses
[Para. 66.1(6)(f) of the definition for CEE] – expenses incurred for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada including the cost of prospecting, carrying out geological, geophysical, or geochemical surveys, drilling by rotary, diamond, percussion, or other methods, and trenching, digging test pits, and preliminary sampling.

Investment tax credit
[Ss 127(9)] – a tax credit usually calculated as a fixed percentage of qualifying investments or expenditures.

Look-back rule
[Ss. 66(12.66)] – allows a principal-business corporation (PBC) to renounce expenditures that it will incur in Year 2 with an effective date of renunciation of December 31 of Year 1. The date of renunciation must be before April of Year 2. If an amount is renounced under the look-back rule, the PBC will be liable to a tax under Part XII.6 of the Act for any amounts renounced but not incurred before the end of February of Year 2.

The look-back rule is only available where the FTS investor deals at arm’s length with the PBC.

Mineral resource
[Ss. 248(1)] – a deposit of base or precious metals, coal, bituminous sands, or oil shale. Also included is a mineral deposit from which the principal mineral extracted is ammonite gemstone, calcium chloride, diamond, gypsum, halite, kaolin, sylvite, or silica (where silica is extracted from sandstone or quartzite) for which the Minister of Natural Resources has certified that the main mineral extracted is an industrial mineral contained in a non-bedded deposit.

right to buy commodities or securities within an agreed period, at a fixed price, or to sell commodities or securities at an agreed price and time.

Preproduction development costs
[Para. 66.1(6)(g) of the definition for CEE] – certain preproduction development costs of a new mine may be CEE. These costs are expenses incurred in and before bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities. This includes the cost of clearing, removing overburden and stripping, and sinking a mineshaft or constructing an adit or other underground entry.

Prescribed share
[Reg. 6202.1] – a new share issued by a PBC which has attributes or benefits not normally associated with a common share. Any arrangements or privileges designed to guarantee the investor a minimum return or guarantee the original investment will generally cause a share to become prescribed. The purpose of this exclusion is to ensure that a flow-through share (FTS) represents genuine risk capital. A prescribed share is not an FTS.

Principal-business corporation (PBC)
[Ss. 66(15) Definitions] – a corporation whose principal business is certain activities related to the oil and gas, mining, renewable energy, or energy conservation sectors. A holding company whose assets are composed of 90% or more of shares or indebtedness of a related PBC may also qualify as a PBC.

Qualifying period
[Ss. 66(15) definition of flow-through share] – begins on the day the agreement was made and ends 24 months after the end of the month that includes that day.

Resource expense
Refers to CEE (which includes CRCE), and CDE but excludes CEDOE that may have been included in CEE or CDE.

A privilege granted to the holder of a security, such as the right to buy more shares of the issuer, or the right to exchange the security held for a different security.

Selling instrument
[Ss. 66(15) Definitions] – for a flow-through share (FTS), means a prospectus, registration statement, offering memorandum, term sheet, or other similar document that describes the terms of the offer (including price and number of shares) by the principal-business corporation (PBC) to issue FTSs.

A certificate that gives the owner the right to acquire newly issued shares.


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