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You are here: Home / Articles / Charities - Current Articles / Budget 2022 Eliminates Certain Types of Flow-Through Shares

Budget 2022 Eliminates Certain Types of Flow-Through Shares

April 8, 2022

By: Karen Cooper

As part of a number of business income tax measures intended to increase federal revenues, Budget 2022 proposes to eliminate the flow-through share regime for oil, gas, and coal activities.  This may have an important impact on a significant donation tax shelter structure.

Flow-through shares are tax-based financing incentives available to the oil and gas, as well as the mining sectors. In the 1990s, the mining and resource industry experienced low mineral prices and therefore a downturn in exploration. As a result, the government introduced an incentive to promote exploration to assist those industries to raise equity through flow-through shares.  These rules effectively permit corporations to renounce or “flow-through” income tax deductions associated with certain activities to shareholders in exchange for the sale of their shares. A flow-through share is generally a financing arrangement whereby an investor/shareholder will invest in exploration by providing funds to a corporation that uses them to incur Canadian exploration expenses, Canadian development expenses or Canadian oil and gas property expenses. The investor receives shares issued by the corporation as consideration and the deductions available to the corporation in relation to these resource expenditures are flowed-through to the shareholders who have provided the funding for the expenditures.  The expenditures deducted by the investor reduce the cost base of the shares held. Once the exploration is complete, investors typically exchange the flow-through shares for normal securities of the issuer (on a tax deferred basis). Since flow-through shares are generally deemed to have an adjusted cost base of nil, a significant capital gain will normally occur when the securities are sold.

The impact of the elimination of the tax on capital gains accruing on donations of publicly-traded securities to registered charities, when coupled with tax incentives on flow-through shares issued by companies in the resource sector, has generated great interest and planning opportunities for investors in this sector.  Flow-through share investors have been able to avoid the capital gains tax impact of disposing of their flow-through shares by donating those shares (provided they are publicly-traded securities) to a registered charity and, at the same time, they receive a donation tax receipt for the full fair market value of the shares at the time of the donation, thereby sheltering other sources of income from tax.

Budget 2022 includes measures that would eliminate the flow-through share regime for oil, gas, and coal activities by no longer allowing oil, gas and coal exploration or development expenditures to be renounced to a flow-through share investor.   This change would apply to expenditures renounced under flow-through share agreements entered into after March 31, 2023.  Investors will no longer be able to deduct these expenditures on a current basis and the cost base of the shares will no longer be reduced accordingly, removing one of the most significant incentives in investing in these shares.

While it is too soon to assess the impact of this measure on donations to the charitable sector, it will certainly cause a number of organizations and donors to take a second look at these donation structures.

Filed Under: Budgets, Charities - Current Articles

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