A flow-through share is a special type of common share issued only in Canada by oil and gas or mineral exploration companies. These shares allow you to claim federal and sometimes provincial, tax deductions or credits, if the company completes the steps required by the Canada Revenue Agency (CRA).
The company will likely charge you a higher price for a flow-through share than for its common shares. This reflects the tax benefit you’ll receive.
What risks do flow-through shares have?
As a type of common share, flow-through shares have all the risks of a common share, and more.
Before considering potential tax deductions or credits, you need to first consider the risks of investing in the company. Never invest in something just because it offers tax deductions or credits.
Companies that issue flow-through shares are mineral exploration companies and oil & gas companies, which have their own risks. There are important questions to ask these types of companies.
There is a risk that the company and its expenditures may not meet the strict government requirements to offer flow-through expenses to you. If that happens, you may not be able to claim the tax deductions that you expected or CRA may reassess your return. In that case, you may have to pay back taxes, potentially many years after you made the investment.
When you sell flow-through shares, CRA will require you to pay tax on the total sale price. This is because you were able to claim the full amount of your purchase price as a tax deduction as long as the company met all the requirements.
Can you sell them easily?
It depends. You can sell flow-through shares like other common shares unless you want to take advantage of the tax deductions and possible tax credit, which usually require you to hold the shares for at least 18 to 24 months.
What are the associated costs?
Like common shares, the only cost of investing is paying the purchase or sale commission, or paying a fee to your advisor to manage your account. There should be no ongoing costs.
What are the expected types of returns?
There are two ways to make money on flow-through shares: tax deductions and/or an increase in price.
Like other common shares, they are subject to capital gains and losses.
If you’re considering a private company’s flow-through shares, you need to consider these risks relating to tax deductions, and the additional risks related to private companies.