The intersection of philanthropy and investment

CONTENT FROM: PHILANTHROPY IN CANADA REPORT

First published in the Globe and Mail on June 21, 2024.

Flow-through shares help support mineral exploration in Northern and remote areas of Canada.JAMES GABBERT VIA GETTY IMAGES

Flow-through shares fund charities and mineral exploration

Mineral exploration plays a crucial role in the economy of Northern and rural Canada, providing jobs and investment that help remote communities cope in an economic environment that offers little else of the same financial calibre.

But the sector also provides a spinoff benefit that few Canadians know about. Mineral exploration and development play a significant role in providing much-needed funds to charities and nonprofits across the country through a financing structure called flow-through shares endorsed by the federal government specifically to encourage investment in exploration companies.

Toronto-based PearTree Canada created the flow-through share donation platform to enable donors to access the tax benefits that accrue from subscribing to and then donating flow-through shares, thus providing two socially responsible and tax revenue neutral activities: Northern, rural jobs and the delivery of social benefits by charities.

Here’s how it works: PearTree identifies an exploration company wanting to raise money and matches it with clients who want to donate to charity. The clients buy shares at a set price providing the exploration company with funds to continue its operations, by spending millions of dollars in the Northern and remote economy, including the creation of jobs.

The clients then donate the shares to a charity of their choice. The charity immediately sells them to an investor identified by the exploration company – usually an institution – at a discount to both the price paid by the PearTree clients and to the current stock market price. The charity receives cash for the shares, and the clients receive tax benefits for the donation.

Ron Bernbaum, PearTree’s founder and CEO, says Canada is fortunate to have high-net-worth individuals and families who care enough to donate significant sums to charity. When those donations can be increased by accessing tax benefits, then charities will benefit as well.

“For many wealthy people, it’s not a matter of giving away money, it’s how much more money can they give away,” he says. “So, what we see in our business is a willingness to give away even more because the cost of giving is lowered by tax benefits. The conversation is always how much more can I give away and how much more can I give away in a tax effective way? We are an enabler for generous people who want to give away their money.”

Mr. Bernbaum says the flow-through shares donation platform can have a significant impact on charities. He points out, for example, that soon after PearTree began operations over 15 years ago, it was approached by one of the McGill hospitals in Montreal to help with fundraising for two new mammography machines. The campaign was expected to take up to three months. With PearTree’s help, the funds were raised in three weeks.

Similarly, he says PearTree helped a Christian school in British Columbia raise all the funds it needed to build a new campus after it hit a fundraising wall at $12-million.

“Our model was a great enabler within that small community, and it makes me feel good to know we were able to help,” says Mr. Bernbaum.

He says while PearTree’s flow-through shares donation platform is just one of the tools available for tax and estate planning and its impact on the charitable sector as a whole is relatively modest when measured against the $4-billion contributed annually by the high-net-worth community, it plays an important role for smaller charities.

“We are particularly helpful to grassroots organizations whose budgets are small and money is very dear,” says Mr. Bernbaum. “They may have two or three supporters for a million and a half dollars helping out a specific cause that is not high on the radar of causes, but yet it’s as worthwhile as any other. And somebody who otherwise would’ve given $100,000 is suddenly giving $300,000. It has a material impact on the charity’s budgets and their ability to provide their services.”

He says the company’s success since it was founded in 2007 is a vindication of its belief that flow-through shares could benefit both the resource and charitable sectors.

“At the beginning, nobody thought the structure had legs or that government would be supportive. But they have been remarkably supportive because there’s no real tax leakage buying flow-through shares which, in effect, fund somebody else’s payroll,” says Mr. Bernbaum. “Our clients access the same exploration deductions and credits otherwise available under the flow-through tax regime and are paying the capital gain on the donation of the shares, there’s no double dipping, and getting a donation receipt for the cash the charity receives, so there’s no valuation gain.”

But, while charities benefit from PearTree’s model, the greater impact is on Canada’s resource sector, he adds.

“Probably 90 per cent of all exploration is financed using flow-through shares. That’s about $1-billion a year of which we do $500-million, so we are more important to the resource sector than we are to the charity sector. By separating the flow-through tax incentives available to the donor as the first subscriber from the resource issuer treasury from the underlying equity which is then sold at a discount, the structure enables global investors to buy into early-stage exploration in Canada. In fact, over 85 per cent of all the investors providing charity liquidity are outside of Canada. However, if you look at the construct as a whole, our model reduces the cost of giving for donors on the one hand and expands the universe of investors in exploration companies on the other,” says Mr. Bernbaum.