Dispositions of Flow-Through
Shares
The cost of a flow-through share to an
investor is deemed to be nil. In most
circumstances, flow-through shares will be
considered capital property to the investor.
Accordingly, the investor will realize a
capital gain on disposition equal to the
full proceeds from the sale of the shares.
Advantages and Limitations
of Flow-Through Shares
For the Investor
Advantages
An investor is entitled to deduct
from its income renounced CEE or
CDE equal to the full amount it paid
for the flow-through shares. In addition,
the investor may be able to claim an
ITC (discussed below). As a result,
the cost of the shares on an after-tax
basis will be less than the cost of
similar shares acquired on an ordinary
subscription basis.
Limitations
There are no particular income tax
disadvantages to an investor that acquires
flow-through shares; however, under
securities legislation, it may be necessary
for the investor (that is, the original
purchaser of the shares) to hold the shares
for a particular period of time. As a result,
if the shares start to decline in value, the
investor may not be able to dispose of the
shares immediately and limit the loss.
For the Corporation
Advantages
Because of the tax saving available to
the investor from the deduction of the
renounced expenses, flow-through
shares can be issued at a premium
over the subscription price for ordinary
shares of the corporation. The amount of
the premium will depend upon market
forces. There is less dilution as a result
of the issuance of flow-through shares.
Limitations
A corporation is not entitled to renounce
expenses other than CEE or CDE.
This restriction limits the utility of
flow-through shares for a corporation
engaged in mining, since a substantial
portion of any funds used to bring a mine
into production will be used to acquire
depreciable property. In addition, flow-
through shares cannot be issued to raise
funds for general corporate purposes.
To overcome these disadvantages,
a corporation will frequently issue a
unit consisting of a flow-through share
and an ordinary common share. The
corporation can then use the proceeds
from the ordinary share portion for
general corporate purposes and to
acquire depreciable property.
There is also a potential tax cost to the
issuance of flow-through shares, since
the corporation is giving up deductions
to which it would otherwise be entitled.
The corporation must therefore consider
whether the premium paid on the
shares is sufficient to outweigh the
increased incidence of tax resulting from
the renunciation of CEE or CDE.
Investment Tax Credits
A taxpayer is entitled to a federal or
provincial investment tax credit (ITC)
when it incurs specified expenditures.
A taxpayer may deduct ITCs against its
tax payable. A dollar of ITC will reduce
Application
As a result of the look-back rule, where a corporation renounces CEE or CDE in a
particular calendar year, the investor is deemed to have incurred the expenses in
the preceding year and is entitled to deduct them in computing the tax payable
for that year. The corporation, however, is required to incur expenses only before
the end of the calendar year in which the renunciation is made. This difference
in timing potentially results in a loss of tax revenue to the government, from the
tax saving to the investor and the deferral of expenditures by the corporation.
Part XII.6 therefore imposes a tax on the corporation, to compensate the
government for the acceleration of the deduction provided to the investor.
Calculation of Tax
Tax is payable for each month after January of the calendar year in which the
renunciation is made and at the end of which all the expenses have not been
incurred. The tax for a month is the product of:
• the amount of the expenses that have not yet been incurred by the end
of the relevant month
multiplied by
• the quotient obtained by dividing the prescribed rate of interest by 12.
In addition, if the corporation has failed to incur the renounced expenses by
the end of the year, the corporation is liable to pay a tax in an amount equal
to 10% of the unspent amount.
Part XII.6 Tax: Summary of the Rules
© 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.
Deductions, Allowances, and Credits
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