Canada’s tax code allows the use of flow-through shares on the assumption that they spur new exploration and that they benefit investors. A new report from the School of Public Policy at the University of Calgary argues flow-through shares (FTS) achieve neither goal.

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FTS are a special type of common share issued by oil and gas or mineral exploration companies that allow the corporation to pass on, or “flow through,” certain expenses that it has incurred to investors. They let corporations that have more expenses than income pass along their expenses for shareholders to deduct from their own income taxes.

Report author Vijay Jog examines rates of return earned by investors in FTS issued during the 2008-2012 period and premiums received by companies issuing them. According to Jog, “While [the] justification for FTS is that they promote activity in the oil and gas and mining exploration and development sectors, it is unclear whether investors received a reasonable rate of return.”

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What’s more, FTS cost the government $300 million in foregone tax revenues. “Our overall conclusion is that FTS seem to do more harm than good and that the time has come to reconsider the wisdom of providing tax incentives such as FTS for investments in particular sectors of the economy.”

But the steepest price, argues Jog, has arguably been borne by investors, with returns on flow-through shares performing poorly. For small companies that issued these shares, the annualized absolute return was a nearly 100% loss. For larger companies, the returns were not as bad— negative 14%—but still a loss. And if adjusted for corresponding benchmarks, the returns were even worse. From the $2.5 billion raised from Canadians using flow-through shares, investors have lost $1.2 billion.

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