Flow Through Shares

May 6th, 2009 – 3 Comments

After the RRSP, flow through shares are the last bastion of tax avoidance in Canada. They are part of the tax code and as long as the company issuing them is in compliance with the statutes you will not have to fight a rear guard action with CCRA.


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I have recently retired and received  a sizable severance package. My broker has suggested – as a tax avoidance – to look at investing in flow through shares. As a need to know I receive a monthly pension that is very good so the severance money is not necessarily required to bolster my pension. What do you know or suggest re flow through shares?? pump

Wayne

Hi Wayne,

Congratulations on the package! Its always a bonus to get a pile of cash on the way out.

After the RRSP, flow through shares are the last bastion of tax avoidance in Canada. They are part of the tax code and as long as the company issuing them is in compliance with the statutes  you will not have to fight a rear guard action with CCRA. The provisions of the tax code allow you to use allowable exploration and development expenses incurred by the issuing company as a deduction on your tax return. The allowable deductions flow through to the investor.

The way that a flow through share works is that the investor who buys them gets to write off the entire amount of the investment. If you buy $20,000 in flow through shares the entire amount is tax deductible which would result in a reduction of your taxes. Assuming that you would be in the highest marginal tax bracket because of the severance the reduced taxes would be in the neighborhood of $10,000.

The effect is that you now have $20,000 in flow through shares and a tax bill that has been reduced by 10,000. The taxes you would have paid have assisted you in buying the investment.

Another thing to keep in mind is that your adjusted cost basis for the shares is treated as being zero so when you sell them you will pay tax on the entire selling price. The advantage would come as you will be at a lower tax bracket in retirement.

Flow through shares are not without risk as they are generally issued by small exploration companies in oil and gas and in mining. The smaller the company the higher the risk. There are  syndicates that offer portfolios of flow through shares that spread the risk by acquiring shares in many exploration companies.

I would suggest that you get in touch with an accountant to make sure you take advantage of your ability to shelter as much of the package into your RRSP as possible then look to other avenues for tax relief. In closing you should make sure that you consider the flow through shares as an investment first not simply as a way to avoid tax. Would you buy the shares without the tax angle?

Happy Capitalism!

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