First published as part of the Investing in mining special feature in the February 28 Globe and Mail, produced by Randall Anthony Communications.
The growth in demand for critical minerals has brought opportunities for mining in Canada, although exploration and mine development are expensive undertakings. An investment tool that has gained prominence to support these activities is charitable flow-through common share financing, a unique Canadian structured-finance mechanism that plays a crucial role in the country’s mining sector.
Flow-through shares allow resource companies to renounce or “flow through” the tax deductions and credits associated with their Canadian exploration activities to investors, who can deduct the expenses in calculating their own taxable income.
“Flow-through regime tax incentives outperform any other way of raising money quickly in sectors that are of importance to Canada,” says Ron Bernbaum, founder and CEO of PearTree Canada in Toronto, the originator of the Flow-Through Share Donation Platform, which connects donors, investors and mining companies. For the mining sector, it ensures a flow of exploration capital to provide jobs for Canadians in northern, remote and Indigenous communities. At the same time, it helps donors amplify their donation dollars for charitable causes throughout the country.
“For mining companies, this means more capital and support to achieve their long-term exploration and development goals,” he says. “For Canada, it means jobs and investment in rural and remote communities, all while funding worthy charities.”
Mr. Bernbaum says the charity flow-through structure reduces risk for investors and now accounts for more than 90 per cent of exploration investment in junior mining companies. This includes those exploring for critical minerals that play a key role in the green energy transition.
However, he notes that recent tax amendments in Canada are creating uncertainty in the market, with the increase in the Capital Gains Inclusion Rate as well as changes in Canada’s Alternative Minimum Tax (AMT) rules.
“With reduced tax value, you get reduced uptake,” he says, noting that there is a direct correlation between the tax value and the availability of financing “for what is essentially venture capital. In 2024, the Capital Gain Inclusion Rate increase, now rescinded, plus changes in the AMT rules resulted in well over $200-million of lost economic activity – largely jobs by junior mining companies.”
The Canadian government established the flow-through share tax regime in the 1970s to encourage resource-sector investment in the country. Flow-through shares were typically issued through retail brokers and limited partnerships. Resource issuers could “flow through” the tax deductions and credits associated with the issuers’ exploration activities to the first subscribers of these common shares.
Since PearTree’s founding in 2007, after Mr. Bernbaum obtained confirmation by the Canada Revenue Agency through an Advanced Income Tax Ruling as to the appropriateness of the structure, the company has completed more than 700 flow-through financings, funding more than $4-billion in exploration capital.
“We’re an enabler, with one platform enabling two sets of value propositions,” he explains.
In the approach, a resource company issues common shares, designated as flow-through shares under Canadian law, to fund mineral exploration and mine development activity within Canada.
Philanthropists buy those shares and therefore gain access to deductions and tax credits, then gift the shares to the Canadian charities they choose. The charities sell the shares to accredited end-buyers and issue the donors tax receipts equal to the sale proceeds.
The end-buyers acquire the shares at a discounted price. These are often long-term strategic and institutional investors, Mr. Bernbaum says, which protects the economic interests of existing shareholders. He notes that many are global institutional investors from countries such as Australia looking to acquire high-quality Canadian mining shares.
PearTree’s platform has helped create jobs in rural and remote communities while supporting Canadian charities. Mr. Bernbaum says the company currently finances some $500-million annually into Canadian mineral exploration and mine development.
He notes that the original focus of the platform was “philanthropically motivated,” with high-net-worth individuals and families looking to reduce the cost of giving to charities, often because they would like to give more.
“Most people increase their donations by 150 per cent once they become clients, because the cost of giving is lower,” he says.
For the mining industry, Mr. Bernbaum says the model “provides a valuation bridge between what we can pay for a share and then sell a share stripped of tax value, therefore reducing dilution and increasing access to risk capital.”
He points out that on the TSX Venture Exchange, which covers the junior exploration market, the 10-year return rate is -65 per cent.
“This is venture capital at its riskiest,” he comments. “The likelihood of finding a resource of size sufficient to warrant a billion-dollar mine investment, especially in the regulatory world we live in, is low.”
He feels the velocity and the results of the flow-through model could never be replicated by government investment directly.
“Tax incentives work, and they work better, more efficiently and at less cost to government than any other way of raising capital in industries that you want capital to be raised in,” Mr. Bernbaum says.
There should be an expansion of the flow-through regime to include broader categories of exploration and mining activity, he adds. “If we want to see robust economic activity in the North – jobs, potable water, quality of life – as well as Canadian sovereignty, then it’s critical to expand the tax incentives and let the public make the investments.”
Advertising feature produced by Randall Anthony Communications. The Globe’s editorial department was not involved.
