A flow-through share is a security issued by a resource company that waives its exploration deduction in favour of the investor. With March 30, 2004 Budget Speech, the gouvernement du Québec has extended indefinitely the fiscal measures of the flow-through share system’s fiscal measures.
Québec Income Tax
Québec’s Taxation Act provides for substantial deductions from the taxable income of an investor who acquires flow-through shares. In all cases, it offers a basic deduction of 100% of the cost of flow-through shares. For shares acquired after March 30, 2004, an extra 25% deduction is granted if the expenses are incurred in Québec by a non-operating company. An additional 25% deduction is also granted if exploration is conducted from the surface. This gives a total possible deduction of 150% of the amount invested. Beginning on June 5, 2014, the total deduction is reduced to 120% of the cost of the investment: i.e. the basic 100% deduction, plus 10% for each additional deduction.
After March 31, 2004, two additional modifications apply. When a flow-through share is sold, the investor may be exempted from the deemed capital gain: in other words the portion of the sale price between the purchase price of the shares and their adjusted cost base, which is zero. It may also deduct certain issue expenses foregone in its favour, over a period of five years.
Federal Income Tax
Under the Income Tax Act, an individual may claim a basic deduction of 100% of the cost of an investment made in connection with flow-through shares. In addition, the federal government grants a non-refundable tax credit equal to 15% of the surface exploration expenses incurred before April 1, 2015.
When the flow-through share is sold, the individual must pay capital gains tax on the entire sale price, since the adjusted cost base of the share is zero.
A most advantageous net fiscal cost
For fiscal year 2016, the net cost after tax per block of $1,000 in flow-through shares is $306.78 where the individual concerned has attained the highest tax bracket.
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