Flow-Through Shares for Technology Startups

Canada already has a mechanism designed to persuade private investors to put their own money into risky, strategically important economic activity. It is called the Flow-Through Share.

For decades, Flow-Through Shares have been associated primarily with resource exploration. The core idea is simple: when an eligible company incurs qualifying expenditures, certain tax deductions can be transferred — or “flowed through” — to investors who bought specially issued shares. The investor receives the tax benefit. The company receives the capital it needs to undertake the work.

The question behind FTS-Tech is straightforward: if Canada can use this kind of market-based incentive to help finance high-risk exploration underground, why not test whether the same principle can help finance high-risk technology commercialization above ground?

First: What Exactly Is a Flow-Through Share?

A Flow-Through Share is a special class of share issued by an eligible corporation. The company agrees to spend the money it raises on defined qualifying activities. It then renounces eligible tax deductions associated with those expenditures to the investors who purchased the shares.

In plain English: the company needs capital now. The investor is willing to take the risk. The tax system improves the investor’s after-tax economics in exchange for putting that money into an activity Canada has decided is worth encouraging.

The traditional model, simplified

1. An eligible company identifies qualifying expenditures it wants to finance.
2. The company issues Flow-Through Shares to investors.
3. Investors provide real private capital to the company.
4. The company spends that capital on qualifying activities within the rules.
5. Eligible deductions associated with those expenditures are renounced to the investors.
6. The investors claim the deductions subject to the applicable tax rules.

The important part is what does not happen: government does not write the company a cheque for the amount raised, and government does not choose the company on behalf of the investor. Private investors make the investment decision and bear the investment risk.

So What Is FTS-Tech?

FTS-Tech is the proposed adaptation of that basic financing principle for qualifying Canadian technology companies. The objective is not to copy the resource-sector rules word for word. Technology has different economics, different expenditures and different commercialization risks. The objective is to use the same policy logic: define the expenditures Canada wants to encourage, establish clear eligibility rules, and use the tax system to attract private risk capital toward them.

The current proposal is a three-year FTS-Tech pilot supporting up to $500 million annually in qualifying technology expenditures financed through Flow-Through Shares. That $500 million would be private investors’ risk capital — not $500 million of direct government spending.

What could qualify?

The exact rules would need to be designed by government. But the policy target is technology startup and commercialization activity — the expensive work required to turn Canadian research, intellectual property and technical capability into companies that can actually compete in the market.

• Product development and engineering tied to commercialization.
• Software, AI, cybersecurity, quantum, semiconductor, robotics, clean-technology and other qualifying technology development activities.
• Prototype development, testing and technical validation.
• Eligible technical personnel and specialized commercialization expenditures.
• Other defined expenditures that move a qualifying Canadian technology company from invention toward commercial scale.

The principle matters more than this illustrative list: the rules should be specific enough to prevent abuse, broad enough to reflect how technology companies actually build products, and simple enough that founders and investors can use them.

Why Would Canada Do This?

Because Canada does not have an ideas problem. It has a recurring capital-availability problem at the moment when promising technologies need to become companies.

A startup can be created in Canada and still become, economically, part of another country’s innovation ecosystem if its first meaningful financing, senior commercial team, headquarters, intellectual property strategy and later rounds are pulled elsewhere. Once a company enters a deeper capital ecosystem early, later financing, board relationships, executive hiring and scale-up decisions can follow.

FTS-Tech is designed to attack that problem at the financing level: give Canadian investors a stronger reason to fund Canadian technology risk earlier, before the company has to look elsewhere simply because the capital is easier to find there.

How Is This Different From Another Government Subsidy?

This distinction is central.

A grant program asks government to decide which applicant receives public money. A Flow-Through Share model asks government to define the rules, then lets private investors decide which eligible companies deserve their capital.

A Simple Example

Imagine a Canadian technology startup needs $5 million to complete product development, validate its technology and reach commercial customers.

Under a conventional financing, investors evaluate the opportunity and decide whether the potential return justifies the risk. Under an FTS-Tech structure, the company would still have to win that investment on its merits. But if the company and expenditures qualify, the investor could also receive the tax deductions associated with the eligible spending.

That additional tax value can make a high-risk Canadian investment more attractive without government deciding that this particular startup should win. The investor makes that call.

The company receives growth capital. The investor receives shares plus the applicable tax benefit. Canada increases the odds that the product, jobs, intellectual property and future scale-up activity are built here.

Who Would FTS-Tech Be For?

Technology founders

Founders who have credible technology, a serious commercialization plan and qualifying expenditures — but need risk capital to get from technical promise to market traction.

Canadian investors

Individuals and other eligible investors willing to put capital at risk in Canadian technology companies, with tax treatment designed to recognize that risk and encourage participation.

Canada’s innovation ecosystem

Employees, universities, suppliers, angel investors, venture funds, professional services firms and communities that benefit when more companies build and scale domestically.

Government

Governments that want more private-sector participation in innovation financing without turning every funding decision into a government selection process.

Why Focus on Startups?

Because the first serious financing decisions can shape everything that comes after.

FTS-Tech is primarily about helping technology startups get funded and commercialize in the first place. Later-stage companies may be eligible if the eventual rules permit it, but Series B, C or D financing is not the centre of the proposal. The policy problem starts earlier: too many good companies reach the point where they need meaningful risk capital before they have enough scale, revenue or collateral for conventional financing.

If that first meaningful capital comes from another ecosystem, the downstream effects can be enormous. Future rounds, board members, senior executives, customers, acquisitions and eventually headquarters decisions may be influenced by where the company found the capital to survive and grow.

Would FTS-Tech Guarantee That Companies Stay in Canada?

No. And it should not try to.

Canada should not build walls around founders or punish entrepreneurs for selling internationally, raising capital abroad or expanding into the United States. A global technology company should be global.

The goal is different: make staying and scaling in Canada a realistic financing choice. A founder should be able to say, “I can raise meaningful capital here, hire the team here, build the intellectual property here and still compete globally.”

What Would Protect the System From Abuse?

Any serious FTS-Tech pilot would need clear guardrails. The credibility of the mechanism depends on them.

• A precise definition of qualifying technology companies and qualifying expenditures.
• Documentation and reporting requirements showing how the capital was used.
• Time limits for deploying the funds into eligible activities.
• Rules governing the renunciation of eligible expenditures to investors.
• Independent tax and securities compliance using existing Canadian regulatory structures where appropriate.
• An annual review of uptake, capital raised, compliance, economic outcomes and unintended consequences.
• A fixed pilot period so government can measure the results before deciding whether to continue, modify or end the program.

That is one reason for proposing a pilot rather than pretending every design question has already been answered.

Why a Three-Year Pilot?

Because Canada does not need another decade of theoretical debate before testing whether the mechanism works for technology.

A three-year pilot creates enough runway for founders, investors, advisors and markets to learn how to use the structure while giving government a defined review point. A cap of up to $500 million annually in qualifying technology expenditures keeps the experiment measurable and bounded.

If investors do not use it, we learn something. If they do use it but the capital does not create meaningful Canadian commercialization activity, we learn something. If it succeeds in mobilizing significant new private risk capital into Canadian technology companies, Canada has evidence for what to do next.

Frequently Asked Questions

Is the proposed $500 million annual cap government spending?

No. The proposal is for up to $500 million annually in qualifying expenditures financed through Flow-Through Shares. The capital invested in the companies would come from private investors. The fiscal cost to government would arise from the associated tax treatment, not from government directly investing $500 million into startups.

Would government pick the companies?

The intent is no. Government would establish eligibility rules. Eligible companies would still have to persuade private investors to fund them.

Would every technology startup qualify?

No. Eligibility would need to be defined carefully. FTS-Tech should support qualifying technology development and commercialization activity, not become a generic tax preference for every company that calls itself “tech.”

Is this just venture capital with a tax break?

Not exactly. Venture capital is one source of startup finance. FTS-Tech is a financing mechanism that could potentially be used by eligible investors and issuers within the rules established for the pilot. The purpose is to enlarge the pool of private capital willing to take technology risk in Canada, not replace venture capital.

Why not simply expand grants?

Grants can be valuable, but they are a different instrument. FTS-Tech is designed to pull additional private risk capital into the market and leave the investment decision with investors. It can complement grants, tax credits, procurement and other innovation programs rather than replace them.

Does this mean founders should never raise money in the United States?

No. Canadian companies should raise capital wherever it makes strategic sense. The issue is whether Canadian founders have enough credible financing options at home that going elsewhere is a strategic choice rather than a financing requirement.

The Bigger Idea: Let Canadians Invest in Canadian Innovation

Canada has spent years asking how to create more innovation. FTS-Tech asks a different question: how do we give more Canadians a reason to finance it?

The country already knows how to use the tax system to mobilize private risk capital in a strategically important sector. The proposal is to test whether that same policy principle can be adapted for another strategically important part of the economy: Canadian technology startups trying to commercialize and scale.

What Happens Next?

FTS-Tech is a policy proposal. It will only move if founders, investors, technology leaders, taxpayers and policymakers decide the idea deserves a serious test.

If you believe Canadians should have a stronger mechanism for investing directly in the next generation of Canadian technology companies, add your voice at CanFlowThrough.com