For a share of a corporation to be a 
flow-through share, it must:

• be a share or a right to acquire 

a share of a principal-business 
corporation; 

• not be a prescribed share or a 

prescribed right; and

• be issued by the corporation to an 

investor pursuant to an agreement in 
writing under which the corporation 
agrees to incur CEE or CDE and 
to renounce such expenses to the 
investor. 

It is not entirely clear from the definition 
precisely when the corporation 
must qualify as a principal-business 
corporation. Therefore, for certainty, the 
agreement with the investor will require 
the corporation to warrant that it will be 
a principal-business corporation at all 
relevant times and that it will provide 
an indemnity to the investor if the 
investor is not entitled to the expenses 
renounced by the corporation. 

The flow-through share concept is a tax 
concept, not a corporate concept. There 
is nothing in the corporate constating 
documents that would indicate that a 
share is a flow-through share. A share 
will be a flow-through share only to the 
person that enters into the agreement 
with the corporation, and not to any 
subsequent purchaser. Provided that 
a share is not a prescribed share (as 
determined under the Regulations), 
the share can have any attributes that 
the corporation and the investor choose. 
However, the Regulations are so 
detailed and restrictive that, effectively, 
only voting and non-voting common 
shares can be flow-through shares.

The corporation can renounce only the 
qualifying expenses incurred during 
the period commencing on the day the 
agreement is entered into and ending 
24 months after the end of the month 
that includes that day. Investors in 

public transactions will require that the 
corporation renounce the expenses for 
the year in which the investor subscribes 
for shares. The amount of CEE or CDE 
renounced to the investor is limited to 
the amount that the investor paid for 
the shares.
Although it is not necessary that the 
investor contribute its subscription 
proceeds to the corporation at the 
time the agreement is entered into, 
the subscription proceeds must be 
advanced before the corporation may 
issue the shares.
A corporation may not renounce as CDE 
the cost of acquisition of a Canadian 
resource property. 
Where a corporation renounces CEE or 
CDE to an investor, the corporation is 
deemed never to have incurred those 
expenses. 

The Look-Back Rule

The look-back rule permits a corporation 
that incurs specific grassroots CEE 
in a calendar year to renounce those 
expenses to an investor effective 
December 31 of the previous calendar 
year. The expenses are then considered 
to have been incurred by the investor in 
that previous calendar year. 

For the look-back rule to apply to an 
expense:

• the agreement must have been made 

in the calendar year preceding the 
year in which the expense is incurred;

• the investor must have paid the 

consideration for the share in that 
preceding calendar year; and 

• the corporation and the investor 

must deal with each other at 
arm’s length.

The effect of the look-back rule is 
to accelerate the deduction of CEE 
renounced to the investor. To compensate 
the government for the potential loss of 

tax revenue, the corporation is subject to 
an additional tax under Part XII.6 of the 
ITA. A summary of the Part XII.6 rules is 
provided on the following page.

Stacking Arrangements

A stacking arrangement allows a public 
corporation to renounce CEE or CDE 
incurred by a subsidiary where the 
parent and the subsidiary are both 
principal-business corporations. In a 
stacking arrangement, the parent issues 
flow-through shares to the public and 
the subsidiary issues flow-through 
shares to the parent. The subsidiary 
incurs resource expenses and 
renounces those resource expenses to 
the parent. The parent then renounces 
to the purchasers of its flow-through 
shares the expenses incurred by the 
subsidiary and renounced to the parent. 

The look-back rule permits a subsidiary 
to renounce qualifying CEE to the 
parent in one year, which the parent 
can in turn renounce to the purchasers 
of its flow-through shares effective the 
previous year. 

Use of a Limited Partnership

A limited partnership is often used to 
subscribe for flow-through shares in a 
number of different corporations. For 
the purposes of the flow-through share 
rules, a partnership is a person. 

In a typical transaction after the 
partnership has renounced the CEE 
or CDE, it transfers the shares on a 
tax-deferred basis to a corporation that 
qualifies as a mutual fund corporation. 
The partnership is then dissolved, also 
on a tax-deferred basis. From the 
viewpoint of an investor, one advantage 
of this arrangement is increased liquidity 
in respect of the investment. Another 
is that the investor’s risk is spread over 
several share issues instead of being 
concentrated in a single issue.

© 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms 
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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 A Guide to Canadian Mining Taxation