Flow-Through Share Financing

Aluin Gilchrist is a Vancouver-based Canadian government civil
litigation lawyer.

Many companies are unable to take advantage of tax deductions because they have no income. If a mining company disclaims income tax deduction for exploration expense, it is allowed to issue shares which give the holders the right to claim that deduction against their own income. The right “flows through.”

For an investor who has sufficient income which would otherwise be taxable, the cost of flow-through share participation in an exploration venture is 30 per cent (or less) of direct exploration expenditure. The effect is to make money available for investment in exploration for new mines even at times when mining is unprofitable.

Basil Kalymon presents a computer model to show how flow-through shares reduce the tax disadvantage of undertaking mining exploration ventures within non-taxable companies as compared to investment through taxable cornpanies, and calculates an appropriate issue price premium for flow-through shares representing a mixture of existing-activity risk with exploration risk. He graphs actual market activity for 1975 through 1985, showing the practical results.