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Flow-through shares

Flow-through shares in Canada (and how you might take advantage of them)

Money.ca Money.ca Editorial Team

Updated Jan 30, 2025

Looking for a way to lower your tax bill while investing in Canada's resource sector? Flow-through shares offer unique tax advantages, especially with Ontario’s flow-through share tax credit. But are they worth the risk? Here’s what you need to know before diving in.

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Flow-through shares in Canada are a tax-advantaged investment that allows companies in resource exploration—like mining, oil, and gas—to pass tax deductions to investors.

In Ontario, the flow-through share tax credit further boosts returns, making it a high-risk, high-reward option.

What are flow-through shares?

  • An investment that has intense tax advantages (which means you get a big refund come tax refund time)
  • Primarily involves investments in the Oil and Gas Industry, the Mining Industry, and the Wind Power Industry
  • The investment is 100% tax-deductible against your income
  • After a certain period (usually 1-2 years) your shares will roll over into a mutual fund which you can sell at any time
  • It turns fully taxable income into future tax-advantaged capital gains
  • You have to look at the Marginal Tax Bracket you’re in to see how much money you will get back come refund time
  • The higher your pay (the more taxes you pay), the more you’ll get out of this

A flow-through share is a specialized investment where you fund a corporation.

In return, you receive shares, granting you partial ownership.

The company then transfers its expenses to you, allowing you to claim 5% of those costs as a refundable tax credit on your personal tax return. This credit encourages and helps small companies access capital.

What is the Ontario Focused Flow-Through Share Tax Credit?

The Ontario Focused Flow-Through Share Tax Credit is a 5% refundable tax credit for individuals who invest in eligible flow-through shares linked to mineral exploration in Ontario.

It allows investors to claim a portion of the company's exploration expenses on their personal tax return, reducing overall tax liability. This incentive supports resource development and helps small mining companies raise capital.

How does a flow-though share work?

Let’s pretend you bought $10,000 worth of flow-through shares.

Let’s also pretend you make the big bucks, and your Marginal Tax Bracket is 43.7%.

When you get your tax refund,  if you work as an employee, you will get $4,370 back, meaning you will have tax savings of $4,370.

This works by multiplying $10,000 x 43.7%= $4,370.

(It’s just like an RRSP- whatever you contribute, you get a tax savings of your marginal tax bracket)

image source: https://www.miningtaxcanada.com

The math of flow-through shares

You invest $10,000 in flow-through shares. Since flow-trhough shares allow companies to pass exploration expenses to investors, you can deduct the full $10,000 from your taxable income. That means you get $4,370 back (assuming you’re in the 43.7% marginal tax bracket).

You'll also get the Ontario Flow-Through Share Tax credit which qualifies you for a 5% Ontario tax credit so you'd get an additional $500 ($10,000 x 5% = $500). 

After 2 years, your shares convert into a mutual fund. If the value remains at $10,000 the adjust cost base (ACB) is $0 meaning your full investment is considered a capital gain. 

Since only 50% of capital gains are taxable, you'll owe tax on $10,000 *0.50 = $5,000. At your 43.7% tax rate, your capital gains tax owed is $2,185

Flow-through shares are unique because the exploration expenses incurred by the issuing company are "flowed through" to you, the investor. When these expenses are passed on to you, they reduce the ACB of your investment.

Here's why:

  • The tax benefits (like deductions) are tied to these exploration expenses.
  • By claiming the tax deductions, the cost base is effectively reduced to reflect the fact that you've already received a financial benefit upfront (via tax savings).
  • This results in the ACB of the flow-through shares being reduced to $0.

When you sell the shares for $10,000, the entire amount is considered a capital gain because of the $0 ACB.

Your net tax benefit:

  • You saved $4,370 upfront in tax deductions.
  • You later paid $2,185 in capital gains tax.
  • Your net tax benefit is $4,370 - $2,185 = $2,185.

Where to buy flow through shares

  • Investment advisors and brokers. Most flow-through share offerings are sold through financial advisors such as Edward Jones or investment brokers such as TD Direct Investing or CIBC Investor's Edge. These professionals often have access to private placements or offerings from resource companies.
  • Private placements. Flow-through shares are typically issued through private placements, where companies raise funds directly from investors. These offerings are often available only to accredited or high-net-worth investors.
  • Financial institutions. Some major banks and investment firms in Canada offer flow-through shares as part of their product lineup. They may have dedicated resource funds or flow-through share pools.
  • Specialized investment firms. Certain firms specialize in resource-sector investments, such as flow-through shares. These firms often package shares into mutual funds or limited partnerships, making them easier to access for retail investors.
  • Company direct offerings. Occasionally, companies in the mining, oil, gas, or renewable energy sectors may offer flow-through shares directly to investors, especially during exploration funding drives.

The risks of flow-through shares as an investment

  • 1. Industry risk

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    Resource exploration: Flow-through shares are issued by companies in industries like mining, oil and gas, and renewable energy. These sectors are inherently speculative because they depend on finding commercially viable resources. If the exploration fails, the company’s value may plummet.

    Commodity prices: The profitability of these companies is closely tied to volatile commodity prices, which can significantly affect returns.

  • 2. High volatility

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    Companies issuing flow-through shares are often small-cap or junior exploration companies. These stocks are highly volatile, with prices fluctuating dramatically based on exploration results, market conditions, or funding availability.

  • 3. Illiquidity

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    Flow-through shares may not trade frequently on public markets. If you need to sell before the holding period ends, it might be hard to find a buyer or sell at a fair price.

  • 4. Premium pricing

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    Flow-through shares are often sold at a premium compared to regular shares because of the associated tax benefits. If the company underperforms, the premium you paid can amplify your losses.

  • 5. Tax complexity

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    While the tax deductions are attractive, the tax treatment can be complicated. You’ll need to track adjusted cost bases (ACBs), manage tax credits, and calculate capital gains. Mistakes or misunderstandings can lead to unexpected tax bills.

    You may also need professional help, adding to your costs.

  • 6. Lack of diversification

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    These investments are concentrated in specific industries and companies, which increases risk compared to diversified investments like index funds or ETFs.

  • 7. Long holding period

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    Flow-through shares often require you to hold the investment for 12-24 months, locking up your money. During this time, market conditions or company performance could deteriorate.

  • 8. Environmental and regulatory risks

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    Resource exploration is subject to environmental and government regulations. Changes in policy, permits, or community opposition can delay or halt operations, affecting returns.

Who should consider flow-through shares?

They’re generally suited for high-income investors with tax liabilities who can afford to take on significant risk and are comfortable with the complex tax implications. 

If your primary goal is maximizing tax benefits and you have other, safer investments in your portfolio, flow-through shares could complement your strategy.

If you’re unsure, consult a financial advisor to determine if they align with your risk tolerance and investment goals.

Pros and cons of flow through shares

Pros

Pros

  • It’s a nice tax shelter from the government (as we know, there are few tax shelters!)

  • If you’re in a high tax bracket, it’s one way to not have to be gauged in paying taxes

  • You help stimulate the Canadian economy, eh?

Cons

Cons

  • When you sell, the adjusted cost base is $0, so whatever you have is considered a capital gain

  • They can be super risky

  • They are often sold at a premium

  • It would be supportive of the oil and gas industry, mining.. I guess that’s what Canada is all about, but if you have issues with it in terms of the environmental consequences of supporting exploration companies, then it might not be for you

  • Doing the taxes for flow through shares is complicated. You’ll probably need to get an accountant involved (which might incur extra costs)

My own experience with flow through shares

Initially in my personal finance journey, I was tax savings hungry and all I cared about was getting a nice fat tax refund.

One shouldn’t just jump into an investment for the tax refund (trust me, I know from experience).

I bought $5,000 worth of flow-through shares.

I received approximately $1,500 in a tax refund which I later reinvested into something else.

However, the current value of my flow-through shares is $1,800 (note that I had invested $3,500 initially).

So if I were to sell it (which I plan to do soon), I would have to pay about $270 in capital gains tax. So I had actually received $1,230 in a tax refund, were I to sell it at its current pricing. So I am down a net of $1,930.

So as you can see, flow-through shares have not been good to me. I’ve had much better results using basic index funds and recently switching over to a “hands-off” index investing with Wealthsimple.

Tips on buying flow-through shares:

  • Flow Through shares should not to exceed 5-10% of your portfolio since they’re so risky
  • They can be bought buy your local financial adviser (mine kind of pushed them on me)
  • They are usually sold at certain times of the year (“offerings”) and are often sold at a premium
  • Try and time your flow through shares purchase well
  • Make sure you understand that your money won’t be accessible for at least a year or two- so don’t buy it if you’re planning to save up for a large purchase
  • Don’t be like me and just get it for the tax advantages (though very tempting, I know)

I hope that helps clarify the confusion.

Any readers out there have flow-through shares in their portfolio? Let us know your experience below.

FAQ

  • Are flow through shares permitted for Canadian life science companies?

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    No, flow-through shares are typically limited to companies in resource exploration industries such as mining, oil, gas, and renewable energy. Canadian life science companies are not eligible because flow-through shares are designed to incentivize investments in resource exploration and development under specific tax legislation.

  • Can you donate flow through shares?

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    Yes, you can donate flow-through shares to a registered charity. This can be a tax-efficient strategy because you may receive a charitable donation tax credit while also avoiding the capital gains tax that would apply if you sold the shares directly.

  • Are flow-through shares a good investment?

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    Flow-through shares can be a good investment for high-income individuals seeking tax savings and willing to accept high risk. They are speculative, tied to volatile industries like mining, and can result in losses. Consider them only if you have a well-diversified portfolio and can handle the risk.

  • How do flow through shares work in Canada?

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    Flow-through shares allow resource companies to pass exploration expenses to investors. You invest in these shares, claim tax deductions for the full investment amount, and later pay capital gains tax when selling. While offering significant tax savings upfront, they are high-risk investments tied to resource exploration.

  • How to buy flow through shares in Canada

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    You can buy flow-through shares through financial advisors, full-service brokerage firms, or specialized investment firms offering private placements. They are usually issued during specific offering periods, so consulting a professional or monitoring announcements is essential for access.

  • Where to buy flow-through shares?

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    Flow-through shares are typically available through full-service brokerages like TD Direct Investing, Scotia iTrade, or private investment firms. You can also purchase them via financial advisors specializing in resource investments or directly from companies offering private placements.

  • Are flow-through shares structured products?

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    No, flow-through shares are not structured products. They are equity investments issued by resource companies. However, they can be packaged into structured products, such as flow-through limited partnerships or funds, to make them more accessible to investors.

  • Do I deduct the purchase of flow through shares?

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    Yes, the amount you invest in flow-through shares can be deducted from your taxable income because the resource company transfers its exploration expenses to you. This makes the entire investment tax-deductible in the year of purchase.

  • How are flow through shares taxed?

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    You receive upfront tax deductions when you invest. However, the adjusted cost base (ACB) is reduced to $0, meaning the entire sale amount is treated as a capital gain. You’ll pay tax on 50% of the gain at your marginal tax rate when you sell.

  • What are the benefits of flow-through shares?

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    Flow-through shares provide significant tax savings by allowing investors to deduct the full investment amount from taxable income. They also offer exposure to potential gains from resource exploration and contribute to funding the Canadian resource sector.

  • When were flow through shares created?

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    Flow-through shares were introduced in 1954 as part of Canadian tax legislation to encourage investment in the natural resource sector. They were designed to help junior exploration companies raise capital by offering investors attractive tax benefits.

Money.ca Money.ca Editorial Team

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