Within the Canadian wealth management industry, flow-through shares (FTS) stand out as a powerful tool for high-net-worth individuals seeking both tax efficiency and exposure to the resource sector.
In this article, we will cover how flow-through shares work, why they are a strategic tax-advantaged investment and who should consider adding them to their portfolio.
What are flow-through shares?
The Canadian government introduced flow-through shares to encourage investment in the resource sector. Certain corporations in this sector — like mining, oil and gas — can issue FTS to help finance their exploration and project development activities. These companies transfer, or “flow through”, their exploration and development expenses to investors, allowing the investors to deduct these expenses from their taxable income. This approach transfers the tax benefits of exploration spending from the company to the shareholder.
Key benefits
The primary appeal of flow-through shares lies in their tax advantages:
- The investment is 100% tax-deductible against your income
- Federal Investment Tax Credit (ITC) of 15% for qualifying mining expenditures
- The reduction of ones taxable income may allow for Old Age Security to be paid rather than clawed back for some individuals
Another advantage of investing in flow-through shares is that it directly supports the expansion of Canada’s resource sector. These investments supply essential funding required for exploration projects, leading to the discovery of new resources and the advancement of Canada’s natural resource industries.
Investment strategy
Flow-through shares are best suited for:
- High-income investors looking to reduce taxable income
- Those with existing diversified portfolios who can tolerate higher risk
- Investors interested in supporting Canadian resource development
Risks and considerations
Despite their tax appeal, flow-through shares carry significant risks including:
- Volatility: Issuers are often junior exploration companies with uncertain prospects.
- Liquidity constraints: Flow-through shares are often less liquid than other types of investments meaning that investors may find it difficult to sell their shares quickly, especially in a down market.
- Tax complexity: The tax benefits associated with flow-through funds are complex and require careful management.
- Regulatory and environmental risks: Exploration projects are subject to changing government policies and community opposition.
Flow-through shares are a high-risk, but potentially high-reward investment. Your wealth advisor is here to help navigate these risks and advise if they may be suitable to include in your portfolio. Your advisor will:
- Assess suitability based on income and risk tolerance
- Navigate the tax reporting requirements
- Monitor the performance and compliance of the issuing company
Conclusion
Flow-through shares offer a compelling opportunity for tax savings and resource sector exposure. For the right investor, they can be a strategic addition to a well-balanced portfolio. If you’re interested in exploring flow-through shares as part of your investment strategy, contact your Rothenberg wealth advisor to discuss whether they align with your financial goals.
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the article and your Individual tax situation. Flow Through Shares and other sophisticated products are not suitable for all investors & carry specific risks, inquire with your advisor directly for more information.. Harbourfront Wealth Management Inc is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.
Sources:
How the flow-through share (FTS) program works – Canada.ca
What Are Flow-Through Shares in Canada? Tax Benefits & Ontario Tax Credit
