Flow-through shares (“FTSs”) are a powerful tax-advantaged investment available in Canada. Beyond the basic deductions discussed in Flow-Through Shares Part I, several additional rules and incentives can significantly affect an investor’s after-tax return. This article considers three key areas that often come up in advanced FTS planning: mineral exploration credits, Alternative Minimum Tax (“AMT”), and charitable donation strategies.

All legislative references in this article are to the Income Tax Act (Canada) (the “Act”) unless otherwise specified.

What tax credits are available to investors?

The Mineral Exploration Tax Credit (“METC”)

In addition to the standard flow-through share deductions, individual investors (other than trusts) may qualify for the federal METC.

Key features:

  • The METC is a 15% non-refundable tax credit on eligible exploration expenses renounced under an FTS agreement.
  • Credits may be applied against federal income tax, carried back 3 years or carried forward 20 years.
  • The METC applies to certain surface-level exploration expenses described under paragraph 66.1(6)(f) of the Act.
  • As of March 3, 2025, the federal government has proposed extending the METC to March 31, 2027.

The Critical Mineral Exploration Tax Credit (“CMETC”)

Introduced in Budget 2022, the CMETC offers an enhanced incentive for investors supporting Canada’s critical minerals sector.

Highlights:

  • 30% non-refundable tax credit for eligible investors.
  • Only applies to exploration expenses related to specified critical minerals (e.g. copper, nickel, lithium, cobalt, and rare earth elements).
  • Budget 2023 expanded eligibility to lithium from brines for expenses incurred after March 28, 2023.
  • Scheduled to expire March 31, 2027, unless extended.
  • Budget 2025 proposed an expansion of eligibility to include bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin, and tungsten. This measure would apply to expenses incurred between November 4, 2025 and March 31, 2027.

Can you claim both the METC and the CMETC?

No. The METC and CMETC are mutually exclusive. The same dollar of exploration expense cannot generate both credits. 

Are the METC and the CMETC included in an investor’s income?

No. Unlike most investment tax credits, METC and CMETC amounts reduce a taxpayer’s cumulative Canadian exploration expense (CEE) pool.[1]  Any negative balance in a taxpayer’s cumulative CEE account at the end of a taxation year is included in income.[2]

What is Alternative Minimum Tax and how does it affect FTS investors?

High-income individuals investing in FTSs sometimes find themselves unexpectedly subject to AMT.

FTSs offer substantial deductions that can dramatically reduce regular income tax. AMT, however, is calculated using a parallel set of rules that:

  • Start with a different tax base called adjusted taxable income (“ATI”).
  • Allow fewer deductions and exemptions.
  • Apply a flat 20.5% federal minimum tax rate.
  • Result in a final tax bill equal to the greater of regular tax or AMT.

What is the current treatment of FTS deductions under AMT?

Under existing rules:

  • For AMT purposes, the FTS deduction is limited to an investor’s specified resource income.
  • Most investors do not have resource income, so their FTS deductions are essentially ignored in ATI calculations.
  • This typically increases ATI, and, in turn, AMT liability.
  • The same restriction applies to certain expenses associated with acquiring FTSs (e.g., interest on borrowed money).

What are the potential changes on the horizon?

Draft amendments released in August 2024 proposed eliminating the rules that deny FTS deductions when calculating ATI. However, Budget 2025 indicated that these proposals will not proceed.

What are the tax incentives available when pairing FTSs with philanthropy?

Canada’s tax system strongly encourages charitable giving, and FTSs can create powerful combined tax benefits for donors.

When you donate FTSs:

  • You still get the FTS deductions and credits (METC or CMETC).
  • You also receive a charitable donation tax credit based on the shares’ fair market value (minus any advantage).

However, special rules apply to the capital gains treatment.

Do you realize a capital gain on donated FTSs?

Normally, publicly traded securities donated to a qualified donee do not result in capital gains.[3]But, for FTSs, subsection 40(12) restricts this exemption.

Example:

  • Investor buys FTSs for $1,000.
  • Claims $1,000 in deductions → ACB reduced to $0.
  • Later donates the shares when they’re worth $1,000.
  • Without special rules: the $1,000 capital gain would be exempt.
  • With subsection 40(12): only gains above the original cost qualify for the exemption.
    In this case, no portion of the $1,000 gain would be exempt.

In short: you can’t claim FTS deductions and also fully shelter capital gains on donated FTSs.

What are structured FTS donation arrangements?

For investors who still want to pair FTS deductions with charitable donations, structured FTS donation arrangements have emerged as a popular planning tool.

How they work:

  1. The investor subscribes for FTSs.
  2. The FTSs are immediately donated to a charity.
  3. The charity sells the shares to a liquidity provider (an institutional buyer) at a pre-arranged discount for cash.

The results:

  • The charity receives cash.
  • The investor receives a donation tax credit and retains the original FTS deductions.

Final Thoughts

FTSs offer a uniquely Canadian combination of investment leverage, tax efficiency, and support for the natural resources sector. But the system is complex—with competing tax credits, AMT interactions, and structured donation strategies—and specialized advice is essential. Our Corporate Tax group is available to discuss the structure, compliance issues, and strategic implications of FTS arrangements.

[1] Definition of “cumulative Canadian exploration expense” in subsection 66.1(6)

[2] Subsection 59(3.2)

[3] Paragraph 38(a.1).