Few Canadian charitable sector professionals have ever heard of flow-through share donations. Yet, over the past two decades, hundreds of Canadian charities have collectively received hundreds of millions in such gifts. 

Read the original story: How Canadian mining companies get millions from charitable donations tax loophole

What’s a flow-through share donation? 

A flow-through share donation is a gift of so-called flow-through shares by a donor to a Canadian charity. 

Mining exploration companies issue flow-through shares to raise money when they are ready to explore for minerals or metals. 

This unique type of corporate share offers significant tax advantages for investors. 

Why would a donor want to gift a flow-through share? 

When donors buy and then give flow-through shares to a Canadian charity, they can dramatically reduce the after-tax cost of giving. 

Typically, when a Canadian gives a $1,000 cash donation to a charity, the gift costs about $500 after tax. The initial donation cost is reduced because benefactors benefit from charitable giving tax credits at both the federal and provincial or territorial levels. 

By gifting using flow-through shares, however, that same $1,000 donation can cost a donor as little as $1, according to Peter Nicholson Jr., CEO of Wealth Creation Preservation & Donation, a firm that facilitates such gifts.

Such donations, sometimes referred to as charity flow-through donations, cost Canadians so little because they allow donors to benefit from mining investment tax deductions and credits in addition to charitable donation tax credits. 

Some donors are thus attracted to flow-through share donations because they enable an individual to give more to charity for the same after-tax cost. 

How do charity flow-through donations work? 

A flow-through share donation has multiple steps, all of which are typically pre-arranged by a charity flow-through provider, such as WCPD, and commonly occur on the same day. 

First, a donor purchases some flow-through shares from a Canadian mining exploration company that is raising capital. 

Within hours, the purchaser then donates a portion of these shares to a Canadian charity. 

Shortly thereafter, the charity sells the shares to a so-called back-end buyer for cash. 

The back-end buyer is commonly a mining-savvy investor or institutional fund, according to charity flow-through providers.   

When the charity sells the shares to the back-end buyer, it provides the donor with a charitable tax receipt in the amount the charity sold the shares for, plus fees charged by the charity flow-through provider, such as PearTree Canada. 

What tax credits and deductions can a donor get on such a gift? 

On a charity flow-through transaction, a donor benefits from federal and provincial or territorial charitable donation tax credits and from credits and deductions available to Canadians who invest in flow-through shares.

Investors can deduct the total cost of their flow-through share purchase from their taxes, reducing the amount of their income that will be subject to taxation. 

Investors who purchase flow-through shares also benefit from federal and provincial tax credits, which reduce the overall amount of federal and provincial tax an individual must pay. 

When an individual purchases a flow-through share from a company exploring for critical minerals, such as lithium, they receive a 30 per cent federal tax credit. 

Individuals in several provinces, such as B.C., Ontario, and Saskatchewan, can also benefit from additional provincial tax credits on flow-through share purchases. 

A PowerPoint slide from a presentation delivered by Ron Bernbaum, Founder and CEO of PearTree Canada at the Canadian Association of Gift Planner conference in April 2024 in Ottawa, Ont. The slide says a Quebec resident can use the charity flow-through method to make a $100,000 donation for $1,950—about 24 times less than the cost of a cash gift. 

Who does flow-through share donations? 

While all Canadians can typically purchase flow-through shares, donors who participate in charity flow-through transactions tend to be wealthy.

Donors who commonly use the strategy have an annual taxable income of over $500,000, said Bernbaum during a presentation at the Canadian Association of Gift Planners Conference in April 2024. 

The strategy benefits high-income Canadians more because they pay more taxes. 

Are there financial risks with flow-through share donations? 

If a person buys flow-through shares from a company that does not spend sufficient funds on exploration within the subsequent 24 months, the investor may be denied the tax deduction and credits they claimed.  

Here’s why: The rationale for the flow-through share program is predicated on the fact that mining exploration companies rarely earn income in their early years. 

While many businesses can deduct corporate expenses against their income to reduce their taxes, mining exploration companies often can’t. 

To support the mining industry, the government developed the flow-through share program, which enables companies to “flow” eligible exploration expenses to their investors.  

When an exploration company sells flow-through shares, it agrees to spend the funds raised on eligible exploration expenses, such as drilling, within 24 months. 

If it doesn’t, however, investors can be reassessed by the Canada Revenue Agency. 

Are there social or ethical risks? 

When a person buys flow-through shares for donation purposes, they increase the amount of available money for a mining exploration company. 

Mining exploration companies and charity flow-through providers say this is good, as it helps to create jobs for northern and Indigenous communities and can help resource companies explore for minerals necessary for the clean-energy transition.

However, others say that compared to a simple cash donation, flow-through share donations come with significant social and ethical risks. 

Typically, mining companies are not required to secure the consent of Indigenous people on whose treaty or traditional territory they want to explore before beginning work. 

Merle Davis Matthews, an organizer with the Mining Injustice Solidarity Network, said charities should avoid promoting or accepting flow-through share gifts until Canada’s laws are rewritten to give Indigenous people more control over their treaty or traditional territories.

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