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Canadian Exploration Expenses Explained, Part 2
By: Bernie Doyle - Investment Advisor / Flow-through investing specialist
June 3, 2010
Canada is a resource rich country; natural resources are the backbone of our economy. Lucky we are. The federal government makes it their business to pay close attention to the health of our natural resource economy. Their scope on this industry spans generations into the future. Maintaining world class levels of environmental stewardship and social responsibility in its resource activities Canada is recognized as an international front runner for progressive programs. One of which is a unique tax incentive to encourage Canadians to invest in our natural resource exploration and processing.
The federal government wants to encourage this sector so much that for the last 30 years they have offered some of the most aggressive tax advantaged programs in our nation’s history. One such program is called the Canadian Exploration Expenses program. Where every dollar that is spent in actual exploration activities is 100% tax deductable. Which means that for resource companies engaged in such exploration activities they receive from the government 100% tax deduction on those expenses.
Here is the interesting part, these exploration tax deductions can be transferred from the exploration company to individual investors who invest in them. Simply stated…when you invest in a Canadian company that engages in specific exploration activities of natural resources in Canada you receive 100% tax deduction on that investment. The tax deductions are known as Canadian Exploration Expenses (CEE). They are a tax deduction that the government gives to the company and which then gets passed on to you, the investor. The tax deductions “flow-through” so that you receive the tax benefit for 100% of the investment.
So the tax deduction that is extended to the resource company flows through the exploration companies accounting and it turns up on your T1 as a Canadian Exploration Expense. This means you get a 100% tax deduction for the amount you invested. Commonly known as flow through shares, they are basically common shares that have a special designation of carrying the flow-through tax advantage.
If we use mining as an example then activities such as digging, drilling, sampling and exploration are considered as Canadian exploration expenses. In other words the investment is used “in the ground”. The Canadian government gives you a mighty tax break when you invest in our natural resource companies.
How it works.
Paul, an investor, buy’s $10,000 of common shares in Gold Miners Co. The shares have been deemed flow through shares by the management of Gold Miner Co., which means that Gold Miners Co is going to use the $10,000 for actual work that goes “in the ground” and not for things like buying a helicopter or paying office staff. The Canadian Government gives Gold Miners Co $10,000 in tax deductions because the money was spent “in the ground” (Canadian Exploration Expenses). Gold Miners Co then passes that tax deduction for $10,000 on to Paul and he uses it a as $10,000 tax deduction on his income tax.
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Bernie Doyle is an Investment Advisor specializing in Flow-through shares and Flow-through Limited Partnerships.
You can contact him at TaxDeductions@FlowThroughCanada.com
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