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What Are Flow-Through Limited Partnerships and Flow-Through Shares? An overview

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If you’re a high-net-worth investor or business owner in Canada looking to reduce your tax burden while gaining exposure to early-stage mining opportunities in precious metals or critical minerals, Flow-Through Limited Partnerships could be one of the most overlooked tools in your portfolio. Designed to channel capital into resource exploration and reward investors for taking on that risk. Flow-Through Limited Partnerships offer a compelling combination of tax efficiency, professional management, and access to companies that could be on the brink of significant discoveries.

This article provides an overview of Flow-Through Limited Partnerships, how they work, and why they are a powerful vehicle for Canadians seeking a compelling tool to invest in the country’s critical mineral, precious metals and energy sectors.

 

What are Flow-Through Shares?

When a resource company incurs eligible exploration expenses, it earns certain tax deductions. However, many exploration companies may not have revenue against which to apply these deductions. By issuing flow-through shares, the company can “renounce” or transfer these tax deductions to investors who purchase the shares. This means that the investors, not the company, can claim the exploration expenses as tax deductions, helping reduce their taxable income.

These deductions include:

  • Canadian Exploration Expenses (CEE) are 100% deductible in the year incurred.
  • A 15% Federal Mineral Exploration Tax Credit
  • A 30% Federal Critical Mineral Exploration Tax Credit**
  • Plus, additional provincial tax credits and benefits are available in certain jurisdictions.

Where Flow-Through Limited Partnerships Fit In

Direct purchasing of flow-through shares is not the norm for most individual investors. Instead, they opt for a more diversified approach through investing in a Flow-Through Limited Partnership. These partnerships pool capital from multiple investors and distribute it across a portfolio of eligible junior mining or energy companies that issue flow-through shares.

The structure of the investment looks like this:

  • Investors subscribe to a Flow-Through Limited Partnership.
  • The Flow-Through Limited Partnership purchases flow-through shares from multiple resource issuers.
  • The exploration expenses associated with those shares are renounced to the Flow-Through Limited Partnership and passed on to investors.
  • Investors receive a tax deduction (and, in some cases, tax credits) in the year of investment, with additional net deductions in the following year and beyond.
  • After a typical holding period of 12 to 24 months, the partnership dissolves and distributes the remaining shares to investors, who may sell them on the open market or roll them into a mutual fund to further defer tax.

Why Do Companies Issue Flow-Through Shares?

Junior exploration companies often have no revenues and need capital to fund drilling, surveying, and geological work. Since flow-through shares come with tax benefits for investors, they can raise capital at a premium to the market price.

This premium helps:

  • Offset the dilutive impact of equity financing,
  • Fund early-stage exploration,
  • Keep companies listed and progressing in their exploration goals.

 

Key Benefits of Flow-Through Limited Partnerships for Investors

1. Tax Benefits for Investors

The core appeal of Flow-Through Limited Partnerships is the ability to deduct 100% of eligible exploration expenses against income. Investors may often deduct over 100% of their initial investment depending on the structure and jurisdiction. This tax efficiency makes Flow-Through Limited Partnerships an attractive and financially savvy investment option.

2. Diversification Within the Sector

Rather than investing in a single exploration company, Flow-Through Limited Partnerships provide exposure to a diversified basket of issuers in the Canadian junior mining sector as a more sound strategy to mitigate risk.

3. Professional Management

Experienced fund managers select flow-through share issuers, perform due diligence, and monitor holdings. This professional management reduces the onus on individual investors who may not have the expertise to evaluate junior explorers and provides confidence in the investment.

4. Capital Gains Treatment on Exit

The company reduces the cost base of the flow-through shares to zero, which means that any sale of the shares after dissolution counts as a capital gain. Since the tax rate on capital gains is lower than that on ordinary income, capital losses can offset this increase.

 

Who Should Consider Flow-Through Limited Partnerships?

Flow-Through Limited Partnerships are best suited for:

  • High-net-worth individuals: Those in higher tax brackets benefit most from the existing flow-through share deductions.
  • Accredited investors: Most Flow-Through Limited Partnerships are available only through prospectus-exempt offerings.
  • Tax-aware investors: Those with significant taxable events (e.g., sale of a business or property) can use Flow-Through Limited Partnerships to offset their tax liabilities on income.

Risk Factors to Consider

While Flow-Through Limited Partnerships offer compelling tax advantages, they come with certain risks that potential subscribers should carefully consider, including the following:

  • Speculative Nature of Investment
  • Blind Pool
  • No Assurance of a Positive Return
  • Size of Offering
  • Changes in Net Asset Values
  • Possible Loss of Limited Liability
  • No Resale Market
  • No Review by Regulatory Authorities
  • Share Prices & Resale Restrictions
  • Rate of Return
  • No Dividends or Cash Distributions
  • Agreements with Resources Companies
  • Dependence on Key Personnel
  • Reliance on the Portfolio Manager
  • Concentration Risk

How Flow-Through Limited Partnerships Are Structured

  • Closing Period: Investors subscribe during a short fundraising window (often Fall).
  • Deployment: The fund manager allocates capital to eligible companies before year-end.
  • Hold Period: The partnership holds the flow-through shares for 12 to 24 months.
  • Liquidity Event: The partnership dissolves, and the shares get distributed to investors, who can sell them on the TSX Venture Exchange or other markets.

Tax Filing and Reporting

Investors receive T5013 slips reporting their share of the tax deductions. These are typically available in time for filing personal income tax returns.

Work with an accountant experienced in flow-through share investments to:

  • Claim deductions correctly,
  • Understand capital gain implications,
  • Navigate provincial-specific benefits.
Conclusion: Are Flow-Through Limited Partnerships Right for You?

Flow-through limited Partnerships can be a powerful tool for reducing taxable income while gaining exposure to Canada’s resource sector. Flow-Through Limited Partnerships offer tax efficiency and access to early-stage exploration projects for investors with the appropriate risk tolerance, income level, and investment horizon.

As with all investments, due diligence is essential. Consult your financial advisor and tax professional before participating in any offering.

 

Disclaimer: This article and its content do not constitute financial or investment advice and should not be considered a substitute for professional financial or tax specialist advice.

**This credit has been extended to March 2027