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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