Two-year extension of tax benefits related
to flow-through shares
Luc Chouinard and Jean Désilets
Direction de la politique et de l'économie minérales
A flow-through share is
a share issued by a resource corporation, which foregoes deducting
its exploration expenses in favour of the investor in a context
of public funding. The gouvernement du Québec has extended tax
benefits related to flow-through shares until December 31,
2003.
Québec tax
Québec's Taxation Act states
that an individual investor may enjoy a significant tax deduction
in calculating his taxable income.
The Québec taxation system provides
for a basic deduction of 100% of the cost of flow-through
shares. Further, the individual may enjoy an additional 25% deduction
when the exploration expenses are incurred in Québec by a
company that does not earn mineral resources income.
Added to this is another 50% deduction, bringing the total to 175%
of the investment cost when surface exploration is involved.
The company may also forego deducting
the cost involved in issuing the flow-through shares, in which case
the individual may claim up to 15% of the investment cost that same
year-the surplus being deductible over five other years.
When the share is sold, Québec's
taxation system also provides for an exemption of the deemed capital
gain, i.e. the difference in the share acquisition cost and its
nil adjusted cost price.
Federal tax
Where federal measures are concerned,
an individual investor may, under the Income Tax Act, claim a basic
deduction of 100% of the investment cost incurred to issue flow-though
shares. Moreover, the federal government grants a non-refundable
tax credit in the amount of 15% of the surface exploration costs
incurred before 2004.
When the flow-through share is sold,
the individual pays tax on the capital gain on the entire sales
price, since the base price of the share is deemed to be zero.
A highly lucrative net tax cost
For the 2001 taxation year, the
net tax cost of $1,000 in flow-through shares is $215
for an individual subject to the highest marginal tax rate.
Flow-through
share tax system |
Funding |
Tax
credit rate |
Québec
tax |
Federal
tax |
Exploration
company |
- 100% of the cost of flow-through shares (basic deduction)
plus
- 25% for exploration in Québec
plus
- 50% for surface exploration
|
- 100% of the cost of flow-through shares (basic deduction)
plus
- Investment tax credit of 15% of surface exploration
costs
|
Mining
producer |
- 100% of the cost of flow-through shares
|
- 100% of the cost of flow-through shares
plus
- Investment tax credit of 15% of surface exploration
costs
|
Publication:
Flowthrough shares - To stimulate
mining exploration within Québec
(PDF Format, 497 kb)
|