Flow Through Financing
April 15 is a grim day—no one likes taxes, getting taxed, or paying taxes. That’s just the truth. In the United States, taxes are everywhere from grocery shopping to personal services. But Canada is doing something right. Flow-through financing (or flow-through investments) are typically dedicated to the Canadian market. Flow-through financing is simply a financial instrument where the investor receives a tax credit for their investment, typically in the gas, mining, or oil industries.
In the United States, investors have to pay taxes on their investments, stocks, and other options. However, in Canada, taxes do not have to be paid on flow-through financing options. That sounds like a win to us.
Flow-Through Financing in Canada
In Canada, flow-through financing was established to persuade companies to get into the gas, mining, and oil industries. In order for these resource industry companies to raise capital, they turned towards investors and incentivized them through tax write-offs. Because these finances or investments are tax-free, they are often offered at a premium price to the market share value, as investors are saving money through the tax write-off.
There are two types of flow-through share options in Canada:
- Canadian Exploration Expense: A Canadian Exploration Expense (CEE) refers to companies who are “exploring”, otherwise known as looking for oil for the gas sector of the economy.
- CEEs are typically higher-risk over CDEs.
Canadian Development Expense: A Canadian Developmental Expense (CDE) refers to investors funding drilling and extracting oil that has already been found and has passed through the exploration phase. CDEs are typically lower-risk than CEEs.
What to Look For to Make Money
If you reside in Canada and are looking to make money from flow-through financings, your best bet is to invest in a Canadian Exploration Expense (CEE). While CEEs are typically a higher-risk investment, they offer 100% tax write-offs in comparison to Canadian Developmental Expenses (CDE).
In the first year of investing, CDEs offer only a 30% tax reduction. After the first year, the tax write-offs are only reduced by 30%. Even though a CDEs is a low-risk option, they don’t provide the same tax benefits as CEEs.
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