Flow-Through Shares and Resource Deductions

Introduction
Understanding flow-through shares and resource deductions is essential for Canadian investors, high-income earners, mining-sector participants, tax planners, and anyone looking for advanced tax-saving strategies. Flow-through shares allow resource companies—especially mining, oil, gas, and renewable-energy firms—to transfer their tax deductions to investors. These deductions reduce taxable income, while federal and provincial credits further enhance savings. In many cases, investors receive tax benefits worth more than the amount invested. However, CRA’s 2024 AMT changes significantly impact flow-through investments, requiring careful planning. This guide explains everything Canadians need to know about flow-through shares, resource deductions, risks, credits, and compliance.

Legal and Regulatory Framework
Flow-through shares and resource deductions are governed by the Income Tax Act, CRA mining and exploration rules, Canadian Exploration Expense (CEE) and Canadian Development Expense (CDE) regulations, the federal Mineral Exploration Tax Credit (METC), Québec’s enhanced mining credits, corporate financing rules, AMT legislation, T5013 and T101 slips, and CRA resource-expense renunciation requirements. Companies must file formal renunciation documents to transfer deductions to investors.

What Are Flow-Through Shares?
Flow-through shares are special shares issued by resource companies (mining, renewable energy, oil & gas) that “flow through” their exploration and development expenses to investors. The company renounces its tax deductions to the investor, allowing the investor to claim:
100 percent deduction of eligible exploration expenses
additional federal and provincial tax credits
potential capital gains tax advantages

Flow-through shares are most beneficial for high-income taxpayers seeking significant deductions.

Types of Resource Deductions Available

Canadian Exploration Expense (CEE)
100 percent deductible in the year claimed
applies to early-stage exploration (e.g., drilling, geological surveys)
provides maximum tax impact

Canadian Development Expense (CDE)
30 percent deductible on a declining balance basis
applies to development activities (mine preparation, tunnels, shafts)

Canadian Oil & Gas Property Expense (COGPE)
10 percent declining balance deduction
applies to oil and gas property acquisition

CEE is the most sought-after deduction because it is fully deductible immediately.

Federal and Provincial Tax Credits

Federal Mineral Exploration Tax Credit (METC)
15 percent non-refundable credit
applies to grassroots mining sector investments
enhances tax benefits significantly

Québec Mining Tax Credits (Extremely Generous)
Québec offers some of the highest incentives in Canada:
up to 30 percent investment tax credit
additional super-deduction credits for certain remote or northern regions
refundable credits depending on structure

Québec investors often receive tax savings exceeding 100 percent of the amount invested.

How Flow-Through Shares Create Tax Savings
Example for a high-income Québec taxpayer investing $20,000 in flow-through shares:
$20,000 × 53 percent combined tax rate = $10,600 tax saved from CEE
Federal METC (15 percent) = $3,000
Québec resource tax credit (~30 percent) = $6,000
Total tax benefit ≈ $19,600

The after-tax cost of a $20,000 investment may be under $1,000.

Flow-throughs are one of the strongest tax-shelter tools available—but must be used carefully due to AMT.

Flow-Through Shares and AMT (Critical)
CRA’s 2024 AMT changes dramatically reduce the benefits:
CEE deductions limited in AMT calculations
gross-up of resource deductions
AMT credits for charitable donation strategies limited
flow-through structuring now triggers AMT for many taxpayers

Investors must perform AMT simulations before investing.

High-income investors with large deductions are most at risk.

Risks of Flow-Through Shares
flow-through companies are often early-stage and high risk
investments may become worthless
share price volatility is high
deductions depend on proper renunciation by the corporation
AMT may reduce immediate benefits
flow-through investors may need to hold shares for tax compliance

Flow-through shares are tax-driven investments, not traditional portfolio holdings.

Charitable Flow-Through Strategy
One of Canada’s most advanced tax-planning tools historically combined:
flow-through share purchase
immediate renunciation and deductions
donation of shares to charity
donation credits + zero capital gains

This produced tax benefits exceeding the investment cost.

However, under 2024 AMT rules, charitable flow-through strategies are heavily impacted:
donation credits limited
capital-gains exemption reduced
AMT likely triggered

Still possible, but requires expert planning.

How to Claim Flow-Through Deductions
Investors receive official tax slips:
T101 — resource expense deductions
T5013 — partnership investment slips
Renunciation documents confirm transfer of deductions.

Expenses such as CEE and CDE must be claimed correctly.

Québec provides separate slips for provincial credits.

Corporate and Partnership Flow-Through Structures
Investors may buy flow-through shares:
directly from resource companies
through limited partnerships
through specialty tax-shelter funds

Limited partnerships are common because they:
pool investor funds
diversify exploration projects
provide automatic tax-slip handling

Partnership dissolution usually happens after 2 years.

Capital Gains on Flow-Through Shares
Flow-through shares have a zero cost base after deductions are renounced.
This means any sale results in a capital gain equal to the full sale price.
However:
capital gains may be offset using other losses
capital gains are taxed at 50 percent inclusion
planning required to avoid AMT impact

Flow-through investing is a timing strategy: deduct early, pay later (ideally at lower tax rates).

Who Should Invest in Flow-Through Shares?
Typically suitable for:
high-income earners
investors expecting large taxable gains
professionals paying top marginal tax rates
corporate shareholders seeking tax refunds
Québec residents benefitting from provincial credits
investors comfortable with high-risk small-cap mining

Not suitable for conservative investors or RRSP/TFSA accounts (not allowed).

Common Mistakes With Flow-Through Shares
claiming deductions without renunciation
not tracking cost base correctly
not planning for AMT exposure
donating shares too early
misunderstanding partnership timelines
treating flow-through shares like ordinary investments

Flow-through investments require disciplined tax planning.

Key Court and CRA Positions
CRA enforces strict renunciation documentation requirements. Courts support CRA when investors claim deductions prematurely or without proper evidence. AMT cases involving flow-through shares confirm CRA’s authority to re-calculate benefits. Courts also support CRA denial of aggressive donation-based strategies.

Why CRA and Revenu Québec Audit Flow-Through Investors
tax shelters are high-risk audit categories
large deductions claimed in a single year
unclear renunciation documents
mismatched resource expense claims
donation-based strategies
These factors often trigger audit reviews.

Mackisen Strategy
Mackisen CPA provides complete planning for flow-through shares and resource deductions. We analyze AMT risk, calculate expected tax benefits, optimize timing of deductions, structure flow-through limited partnerships, coordinate charitable-giving strategies, handle Québec mining credits, prepare CRA and ARQ filings, and defend deductions in audits.

Real Client Experience
A Montreal surgeon invested $40,000 in flow-through funds; we structured the investment and reduced taxes by over 95 percent. A corporate shareholder used flow-throughs to offset a large bonus; Mackisen prepared AMT analysis and optimized timing. A Québec investor used mining credits to offset real estate gains; we claimed full provincial credits. A charitable flow-through investor faced AMT exposure; we restructured the strategy safely.

Common Questions
Are flow-through shares legal? Yes — fully sanctioned by CRA.
Can flow-through shares reduce AMT? No — they often increase AMT risk.
Can I deduct 100 percent of CEE? Yes, under regular tax rules.
Are Québec credits refundable? Many are — especially mining credits.
Do flow-through shares have resale value? Often low or volatile.
Do corporations benefit? Yes, but rules differ — planning required.

Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps investors and business owners navigate flow-through shares and resource deductions with maximum tax savings and minimum AMT exposure. Our expert planning ensures full compliance, optimized returns, and audit-proof documentation.