Flow through shares are shares of stock that provide the holder with certain tax benefits that are normally reserved for the stock issuer. The name for these types of shares has to do with the fact that these benefits flow through from the issuer to the individual stockholder. Shares of this type are not available universally, with Canada being one of the few nations in which flow through shares are available.
With flow through shares, the holder is able to claim certain deductions and obtain specified tax breaks that would normally would be exercised by the issuer of the stock. For example, if the company issuing the shares is engaged in the business of mineral exploration, specific credits and deductions would be awarded to the shareholders rather than held by the company. In order to take advantage of those benefits, the credits must be claimed on a portion of the funds expended on the process of mineral exploration within the country where the shares are issued. Typically, the tax benefits are associated with activities that occur during the non-development stages of the process, such as drilling and sampling.
The tax credits and deductions provide the key benefits of flow through shares. Depending on the amount of the claims, the allowable deductions may help to offset gains the stockholder has with other investments, decreasing the overall tax burden. As a result, the stockholder is able to retain more of the returns from his or her investments on an annual basis than would be possible without those credits.
There are also a few potential disadvantages of flow through shares that must be considered. Like any type of investment, it is possible for the company to not turn a profit, a situation that is likely to negatively impact the return generated by the investment proper. When this is the case, the tax benefits may or may not be sufficient to make the investment worth holding onto. For this reason, investors who are considering the possibility of acquiring flow through shares must consider factors other than the projected tax credits, such as the growth potential of the issuing company and the performance of the shares in the marketplace. Unless there are indications that the shares will generate acceptable returns on their own as well as provide enough in the way of tax credits to make the ownership viable, the investor would do well to focus attention on other investment opportunities.
