Five burning questions on charity flow-through shares

By Peter Nicholson

If you’ve been a reader of the Giving Guide over the years, odds are you have heard a lot about charity flow-through shares.

Since my firm Foundation WCPD (Wealth, Creation, Preservation & Donation) completed the first Canadian charity flow-through transaction in May 2006, I have spoken with thousands of major donors, foundation board members and professional fundraisers.

It's fair to say we’ve come a long way since 2006. More than $300 million has been created for charities using charity flows with immediate liquidity, all across Canada, with no CRA issues. We have issued over 8,000 cheques on behalf of clients through the WCPD Foundation and last year we receipted more than $48 million on donations while disbursing $38 million to charities.

There is no doubt the structure is more popular than ever before. And yet, it is often misunderstood. So for my column this year, I decided to answer the five most burning questions I often get asked.

Are flow-through shares risky?

On their own — without immediate liquidity — absolutely. First introduced in 1954, flows are a financial policy instrument used by junior mining companies and facilitated by the government to raise capital for natural resources and critical minerals through a tax deduction equal to the amount invested.

That’s a fancy way of saying you will receive a 100-per-cent tax deduction on the amount you buy. But there is just one problem — traditionally, these investments end up being a homerun or a strike out. These junior mining companies use the money you invested to drill and hopefully find that next big discovery. But nine times out of 10, they fail. Meanwhile, investors must hold these shares for at least four months after purchase and, during that time, the stock could skyrocket or plunge.

Our structure turns that home run or strikeout into a double, every time. That’s why I often call it “the GIC of tax reduction.”

What makes our structure so special? The liquidity provider. Liquidity providers are institutional buyers of shares that understand the mining business. They are willing to assume this stock market risk. However, in return, the flow-through liquidity provider requests a discount on the shares, generally around 30 per cent. Their hope is the share price doesn’t dip below that discount by the end of four months.

But that’s not your problem. When you buy the shares, you immediately donate them to charity. In turn, the shares are then instantly sold to the pre-determined liquidity provider at a discount. In the process, the donor retains that 100-per-cent tax deduction. Finally, the charity receives the cash proceeds from that sale to the liquidity provider and issues a charitable tax receipt to the donor, triggering a second 100-percent tax deduction on the cash value of the donation.

This whole process happens almost instantly.

We all know it costs 50 cents to give a dollar when you donate cash via a cheque. Or a better method is you donate public stock; for example, stock that has doubled without paying a capital gain is a 37-cent cost to donate a dollar, or a 27-cent cost for stock that has increased tenfold. With the charity flow method, due to the two tax policy deductibility, it can cost as little as a penny to give a dollar to as high as a 25-cent cost, motivating donors to give more.

So are charity flow-through shares risky? With an immediate liquidity provider, absolutely not.

Are flows a tax loophole?

A tax loophole implies that someone is skirting the law or bending the rules. Charity flowthrough shares are the exact opposite.

The entire structure is based on two longstanding government tax policies. In this case, flow-through shares are intended to raise capital for junior mining companies. To clarify, these are companies with no revenue; they only believe there is a deposit of nickel, copper or cobalt. And the government is more than willing to provide tax breaks to Canadians that help them find out.

Canada is a world leader in mining, generating hundreds of thousands of jobs and more than $100 billion towards our annual GDP. In fact, because most of this mining occurs in the North, it is the number one employer of Indigenous peoples. Meanwhile, mining produces many of the minerals and raw materials we require to create products that we use in our day-to-day lives. In the last federal budget, critical minerals took centre stage for their role in serving as the building blocks of renewable energy technology.

The charitable tax receipt speaks for itself. Since 1918, the government has offered a 100-per-cent tax deduction for Canadians that support charities. And why not? We are doing the government’s work. For every dollar you give to charity, that is one less dollar they need to spend to help society.

Is mining exploration bad for the environment?

In the past, when you mentioned mining, it conjured images of our grandparents’ generation — destructive, archaic and faces covered in soot.

But on April 7, 2022, the government opened the eyes of many Canadians when it announced the first ever Critical Minerals Strategy, a new set of laws, regulations and tax incentives to help boost the supply of critical minerals, or the building blocks of technology and green energy solutions. Think titanium for solar panels or copper for circuit boards and electronics.

The government is spending $3.8 billion to boost critical mineral production and supply chains over the next 10 years, while introducing an additional 30-per-cent critical minerals tax credit (or 60-per-cent tax deduction) on charity flow-through deals that involve these precious resources. This tax credit is on top of the typical 100-per-cent tax deductibility you receive from a standard charity flow-through deal.

What it adds up to is not only great news for Canada’s transition to green energy, but also for our clients.

Is there any risk to this deal?

Nothing in life is perfect. Charity flow-through shares with an immediate liquidity provider are no exception. There is one remote risk in this deal — the junior mining company must use the funds raised towards exploration. They cannot use it for anything not related to the drill bit.

In all my years of business, having facilitated more than 1,000 flow-through share transactions, I’ve had to deal with it 18 times, or 1.8 per cent of the time. And even if it happens, mining companies must sign an indemnification that they will spend the money correctly. As a result, if a company is reassessed and found in violation, our clients are made whole by a payment from the mining company.

Are charity flows only for billionaires?

While it is indeed a niche product, anyone with a minimum income of $250,000 per year would qualify. It could also work for certain corporations. Remember, charity flow-through shares allow you to reduce your taxes and direct them to charities of your choice. If there is no tax to pay, then charity flows are not the right fit.

For decades, Peter Nicholson has been a recognized leader in Canadian tax-assisted investments with a specialized focus on philanthropic tax planning and tax reduction. Through his work with donors, foundations, institutions and boards, he has helped generate in excess of $300 million for client donations.

How it works:

STEP 1: Buy flow-through shares issued by a Canadian mining company. Every dollar invested in these shares is 100% tax deductible.

STEP 2: Immediately donate these shares to charity. These shares are then instantly sold to a pre-arranged buyer (liquidity provider) at a pre-arranged contractual price. This step eliminates any stock market risk to the donor.

STEP 3: Charity receives the cash proceeds and issues donation tax receipt to the donor, generating a second 100% tax deduction.

THE RESULT: By combining two tax policies (flowthrough shares & donations), the Foundation (WCPD) can help reduce your taxes, and if you wish to, allow you to give more.