How does flow through shares work?

Flow-through shares are a financing tool available to a Canadian resource company that allows it to issue new equity (shares) to investors at a higher price than it would receive for “normal” shares, thereby assisting it in raising money for exploration and development.

What are flow through common shares?

A flow-through share is a type of common share that permits the initial purchaser to claim a tax deduction equal to the amount invested. The flow-through share regime allows public companies to transfer to investors certain exploration expenditures conducted on Canadian soil.

Is flow through shares good?

Ideally you made a ton of money on the shares, but even if you don’t make money on the shares, flow throughs can be a very good investment because of the tax credit. These work really well for people who are in the top tax bracket.

What is flow through premium?

Flow-through shares are stocks that can only be purchased directly from Canadian oil and mineral exploration companies, usually at a slight premium. Companies that issue flow-through shares must spend all the money on exploration in Canada within 24 months of the time of purchase.

How do you calculate flow rate?

Flow-through determines what percentage of incremental revenue results in incremental profit. Flow-through = (Current period revenue – Previous period revenue) / (Current period operating profit – previous period operating profit).

What is a flow thru?

A flow-through (pass-through) entity is a legal business entity that passes all its income on to the owners or investors of the business. With flow-through entities, the income is taxed only at the owner’s individual tax rate for ordinary income: The business itself pays no corporate tax.

How long do you have to hold flow-through shares?

2 years
Holding period – Flow-through shares have a holding period of up to 2 years. You can’t get your money out during this period, no matter how the company is doing or what you need the money for.

Can companies buy flow-through shares?

Can Corporations benefit from buying flow-through? Yes, corporations have the same advantages buying flow-through as does the individual investor.

What is CEE and CDE?

Canadian resource companies are permitted to fully deduct specific exploration and development expenses, known as Canadian Exploration Expense (CEE) and Canadian Development Expense (CDE).

What is a good flow-through number?

A good rule of thumb is I should see 90% of any additional revenues flow in rooms profit and 85% in GOP, that result from increased room rate. Every time I sell a room I have both fixed and variable expenses associated with the sale. Taking the 300 extra rooms, that’s an average of 10 more per day.

Can flow-through be negative?

There are two types of flow-through: positive (when both revenue and GOP are positive) and negative (when revenue is positive, but GOP is negative).

How is flow through calculation?

Flow-through = (Current period revenue – Previous period revenue) / (Current period operating profit – previous period operating profit). The above formula shows Flow-through results between two periods, flow-through can also be calculated on actual results relative to budget.

How are expenses treated under the New Look Back rule?

In order to be eligible to have expenses treated as having been incurred at the end of a calendar year under the new look-back rule, an investor must pay cash and agree to acquire a flow-through share by the end of that year.

What do you need to know about flow through share?

There must be a written flow-through share agreement between the investor and the corporation. The corporation can then renounce and “flow through” eligible exploration and development expenses to the original investors. The type of expenses a PBC can renounce are:

How are flow through shares work in Canada?

The basic principle behind flow-through shares, which are unique to the resource sector in Canada, is that a mining corporation willing to forego the tax benefit of certain CEE and CDE amounts that it incurs can “renounce” these expenditures to investors buying shares in the corporation in certain circumstances.

How are flow through shares treated by PBC?

Where the requirements of the FTS rules are met, the FTS are issued to the investors and the qualifying expenditures are renounced by the PBC in favour of the investors, the investors are treated as if they themselves had incurred the relevant CEE or CDE and may claim deductions in computing their incomes in the manner described here .