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.

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.