The Power of Flow-Through Shares in Canada’s Resource Sector

4 minute read - Published 11:00 AM EST, Tuesday, April 8

This article was authored by Peyton Baird of witan nook.

Flow-Through Shares (FTSs) are used extensively in the junior mining sector to raise funds for exploration but are not as well known to the wider investment industry, especially on the retail side of things. These financial tools are the fuel for exploration which is necessary for the health of the Canadian economy, and can deliver outsized benefits to savvy investors thereby encouraging continued support for the natural resource sector. FTSs are a uniquely Canadian innovation, indicative of how important natural resources are to our economy, and have become a cornerstone of the nation’s mining, oil, gas, and renewable energy sectors. With tax season in full swing, let's explore how FTSs offer a compelling opportunity for investors to reduce their tax burden while supporting the backbone of Canada’s economy - its exploration companies.

Mineral production, by commodity group, 2013–2022 | Natural Resources Canada

What Are Flow-Through Shares?

Introduced in 1954 under Canada’s Income Tax Act, FTSs are a tax-incentivized investment vehicle designed to encourage capital investment in resource exploration by offering investors deductions from their taxable income. Issued primarily by junior mining and energy companies, these shares allow firms to “flow-through” their exploration expenses, known as Canadian Exploration Expenses (CEE), to investors. In return, investors deduct these expenses from their taxable income, effectively turning a high-risk investment into a tax-efficient strategy. With investors being able to deduct 100% of their FTS investments against their taxable income it's easy to see how beneficial they can be, especially if the shares appreciate at the same time.

For exploration companies, many of which operate in a non-taxable position due to lack of immediate revenue, FTSs are a lifeline. By renouncing their tax deductions to investors, these firms can issue shares at a premium over common stock, raising critical funds for drilling, geophysical surveys, and other early-stage activities which help them 'prove up' their resource valuations, and in turn, market capitalization. This mechanism has generated billions for successful major projects like the Ekati and Diavik diamond mines, owned by Burgundy Diamond Mines and Rio Tinto respectively, proving its worth over decades. Nearly all junior miners make use of FTSs, which allow for the prospecting and exploration of projects which in turn are usually acquired by major miners who bring the projects to the point of production.

Leading minerals, by value of production, 2022 | Natural Resources Canada

Investor Advantages: Tax Savings and Beyond

For Canadian investors, FTSs are a rare gem in the tax landscape. The primary draw is the ability to deduct 100% of the CEE against any income source in the year of investment. For example, an investor in the top tax bracket purchasing $50,000 in FTSs could slash their taxable income by the full amount depending on provincial rates. Currently, British Columbia, Saskatchewan, Manitoba, Ontario and Quebec offer provincial FTS programs, while Nova Scotia, New Brunswick, Prince Edward Island and Newfound Land and Labrador do not.

The federal government sweetens the deal with the 15% Mineral Exploration Tax Credit (METC), which is likely to be extended past its date of March 31, 2025, and the 30% Critical Mineral Exploration Tax Credit (CMETC), available until March 31, 2027. The CMETC targets minerals like lithium and cobalt - vital for clean energy technologies - making FTSs a strategic play in the global shift to sustainability. Some provinces, like Quebec, offer additional “super flow-through” deductions, pushing tax savings even higher.

Beyond tax relief, FTSs offer exposure to the upside of resource discoveries. While speculative, a successful find can drive share prices skyward, transforming tax-driven investments into capital gains. However, the zero-cost base of FTSs means gains are fully taxable, and a mandatory holding period - often up to 24 months - locks in capital, requiring a careful risk assessment with tax deductions as the primary benefit of FTSs.

Expenditures; by company type, and spending and price indices; 2014 to 2024 | Natural Resources Canada

A Lifeline for Exploration Companies

For junior exploration firms, FTSs are more than a financing tool - they’re a survival mechanism because of the incentive they provide to investors which encourages their investment. These companies, often pre-revenue and burning cash on high-stakes prospecting, face steep barriers to traditional funding. FTSs bridge this gap by transferring tax benefits they can’t use to investors willing to pay a premium. This premium pricing reduces dilution compared to common share issuances, preserving ownership for existing shareholders while injecting capital for 'shovel-in-the-ground' work which is necessary for 'proving up' the value of a resource.

Take a junior miner exploring Canada’s critical minerals frontier. With the CMETC in play, it can attract investors eager to back battery-metal projects, raising funds to drill uncharted claims. The result? Nearly 70% of exploration financing on Canadian stock exchanges stems from FTSs, underscoring their importance to the sector.

Seizing the Opportunity

As Canada doubles down on its critical minerals strategy, FTSs stand out as a dual-purpose tool: a tax shelter for investors and a catalyst for resource development. With the METC and CMETC deadlines looming, 2025 is a pivotal year to act. FTSs offer a rare chance to profit while powering the future and supporting Canadian natural resource projects.

This article was authored by Peyton Baird of witan nook.