How selling impact junior shares (Globe and Mail June 24, 2024): Terry Lynch last week launched a $20-million flow-through deal for his junior mining exploration company Power Nickel Inc. This wasn’t the ideal time to do the financing, but his hand was forced by an impending change in the capital-gains tax, which will very soon make these transactions significantly harder to pull off.
On June 25, the inclusion rate is set to increase to two-thirds for capital gains of more than $250,000 from 50 per cent. Owing to a quirk in the way flow-through shares sales are taxed, the capital-gains tweak is expected to hit the market in a big way.
Even ahead of the changes, Mr. Lynch is feeling the pinch. The premium on new Power Nickel shares this time around was 1.9 times the market price, or about 10-per-cent lower than when he went to market a few months ago.
“The cost is $2-million just straight out,” said Mr. Lynch, chief executive of Power Nickel.
“And it’s going to get worse.”
Eighty-eight per cent of newly issued flow-through shares in Canada are sold to high-net-worth “front-end” investors, who immediately donate them to a registered charity. This strategy generates two tax breaks, a straight deduction in income for the entire amount paid for the shares, and a charitable tax credit, what many in the flow-through world call the “double dip.”
The only snag for investors is the way flow-through shares are taxed when they are sold. The Canada Revenue Agency designates the cost base on the securities as $0, meaning that even those sold at a significant loss are taxed as a gain. Since charities don’t pay tax, it is the front-end investor that is on the hook.
Like the front-end investors, charities have no interest in holding flow-through shares, so they are flipped to a “back-end” investor at a steep discount in order to generate cash.