What are Flow Through Shares?
- These shares are issued by oil and mineral exploration companies who pass the tax breaks for exploration onto investors.
What are the tax advantages?
- 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.
How does it work?
- As stated above, you get to claim the FULL amount invested against your income. However, when you sell, your adjusted cost base (ACB) is set to $0, ie. whatever you sell for is your PROFIT.
- 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 them?
- This tax break works best for those in the highest tax bracket, but generally works for anyone. I’ve read from various sources that flow through shares should not exceed 10%-15% of your portfolio.
How do I buy them?
-
You can purchase them directly from companies offering them or through mutual fund firms like Front Street Capital and Middlefield Resource Funds (source: Canadian Business Magazine).
What are the risks/disadvantages?
- 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.
- 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 original investment
40% tax bracket - 75% of original investment
30% tax bracket - 81% of original investment
20% tax bracket - 89% of original investment
Summary
- This is a very superficial description of flow through shares. If this topic interests you, you should continue with your own due diligence.
- Personally, I have never purchased flow through shares before, but it’s definitely something I’m going to look into as my tax burden increases
