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Gold/Mining/Energy : Canadian Oil & Gas Companies -- Ignore unavailable to you. Want to Upgrade?

To: HAZ who wrote (4357)	12/31/1997 10:55:00 AM
From: Geoff Trueman	Read Replies (2) \| Respond to of 24920

HAZ -- Flow Through Shares The flow through share financing mechanism allows a Canadian oil and gas company to renounce to an investor Canadian Exploration Expense (as defined in the Income Tax Act and generally including most undertakings prior to well development) in the amount of the share purchase price. The renounced amount is 100 per cent deductible by the investor for the purpose of computing his or her net income for taxation purposes. Generally, the adjusted cost base of the shares is deemed to be reduced by an amount equal to the expenses renouned under the flow through share agreement, leanving the investor with a capital gain for the full amount of the eventual sale price. The capital gain is then subject to inclusion as income at the rate of 75 per cent. So the investor receives not only a deferral advantage but also a tax rate advantage. The flipside is that the company loses the ability to claim the exploration expenditure as an expense. Accordingly, fow through shares are usually issued by companies with no production income or large accumulated tax pools. You are quite correct in noting that flow through shares are usually issued to insiders or at a time when other sources of financiang are less attractive. The key point is that flow through shares should always be issued at a premium because of their many attractive investment atributes. If insiders are taking down flow thorugh shares without a premium they are not treating other shareholders in a fair and equitable manner. Of course, all these rules are tax driven and subject to change at any time. Hope this has been helpful, let me know if you have any other questions (I worked in this area at one time).