A New Strategy with 40%–90% ROI in Year 1 – 02 The Risk Of The Original Model of Flow-Through Shares

Author: James L

This is the first series contributed by our fans, after we gave the shout-out to our community to submit niche passive income strategies – I hope you find this one insightful as usual!😁 The author of this series is James L.

Continuing from the last post, before diving deeper into traditional flow-through shares, you might be wondering: why do I spend time looking into this method, and who exactly benefits from this kind of tax-saving approach?

First of all, it’s obviously for high-income earners—the higher your tax bracket, the more you save. Secondly, it’s especially useful for people who, in a certain year, leave their job with a large severance package, sell an investment property, or cash out stock options and face nearly half their income going to taxes. Even after exhausting all other deductions, their tax bracket remains high. For them, this method is the best choice. Thirdly, it’s very helpful for those who have a large amount in their RRSP and want to withdraw it quickly. For example, a few years ago when the market was strong, some people had millions in their RRSPs, and before turning 71, they must withdraw it all or convert it into a RRIF, which can mean paying a lot in taxes. Traditional methods for “dissolving” RRSPs include borrowing to invest or more advanced borrowing strategies to move RRSP funds to a TFSA or even moving abroad. These are unrelated to this article and have their own drawbacks. With the flow-through share method, you can withdraw a large chunk from your RRSP in one go, possibly paying only 15-20% tax, or even less.

Another popular application is charitable donations. Have you ever donated money and claimed a tax credit? Many people donate $1, but the charity receives less than that after fees. Some savvy donors give stocks instead of cash—maybe they donate 50 cents’ worth, but the charity gets $1. Using this method, theoretically, you could donate 1 cent and the charity would receive $1. Of course, in practice it’s hard to reach that ideal, but donating 20 cents and the charity getting $1 is easily achievable. These are the three main uses of flow-through shares. There are others, like for middle-class people whose incomes are too high to qualify for certain benefits—if you can reduce your income, you might qualify for government benefits like the Guaranteed Income Supplement for seniors.

Sounds almost too good to be true, right? Haha, not quite. If you’re good at internet searches, you’ll find plenty of negative reviews about flow-through shares on financial forums like Reddit. This is also why the method is not widely known. The risk is very high.

At the end of the first chapter, we mentioned an example: in Ontario, with a 52% tax bracket and $500,000 income, you buy $100,000 in flow-through shares. The next year, when filing taxes, you get $52,000 in deductions, $30,000 in federal ITC, and $5,000 in provincial ITC—totaling $87,000 returned. Meanwhile, you still hold $100,000 worth of stock. But when you sell those shares, every cent counts as a capital gain, and since you effectively “bought” the stock for zero (due to the tax deduction), the full sale price is taxable capital gain. So if the stock neither rises nor falls and you sell for $100,000, half ($50,000) is taxable, meaning you owe about $26,000 in capital gains tax.

That would be great if that’s all there was to it—you still come out ahead. But what if the mining project fails and the stock crashes to $10,000? Then when you add it all up, you’ve lost money. Many early flow-through share investors overlooked this and ended up saying it’s a junk method and warning others away. Some luckier ones saw the stock soar with a successful mine, but most readers here are risk-conscious. Betting is fine, but risks must be controlled.

There are ways to hedge risk—like not buying a single flow-through share but a diversified fund of them, or choosing shares with shorter holding periods to reduce uncertainty. You’ve probably heard of “time value.” The shortest I’ve heard is 4 months, meaning you must hold the shares for at least 4 months after transfer. So you still face considerable uncertainty.

I’m not risk-averse myself, but the volatility in mining stocks is extreme—many have been in a bear market for almost 20 years. I’m more of a technical investor; pure luck betting, especially with such long odds, isn’t for me. Also, even if you make $500,000 a year, quickly coming up with $100,000 cash is not easy. And that money must be locked up for 4 months to 2 years, depending on the flow-through share agreement.

So does that mean this method is unusable? Actually, the core of this series has just now begun. In the next post, we’ll introduce the improved flow-through share strategy. You’ll learn how bringing in a third party can overcome the major risks mentioned above—without sacrificing returns. This is the enhanced approach we’ll focus on.