Flow-Through Limited Partnerships
In Canada there are certain incentives given to companies in order to promote exploration and development of certain items - three of the main areas are energy, mining and wind power. The Government provides the incentive in the form of a “Canadian Exploration and Expense Credit” which is a tax credit which can be used to reduce taxes. But since these companies are in the start-up phase they are not yet generating any revenues with which to use the tax credits to offset. So, what they do is FLOW THROUGH the tax credits to the limited partners who can then apply the credits to their personal income taxes. They do this to help attract investors to what could be riskier than average investments (they are start-up projects remember).
Example:
Joe decides to invest in the ABC Mineral Fields Limited Partnership fund. The fund invests in a portfolio of different exploration companies looking to find new mineral deposits in Northern Ontario. Joe invests $50,000 and receives an income deduction equal to $50,000 that he can apply to his personal income taxes. Since Joe earns $250,000 per year, he applies the deduction in the year that he receives them and gets a tax refund of $25,000 (he is in the highest marginal tax bracket which is close enough to 50% to call it 50% for the sake of math).
So Joe has $50,000 invested and it only cost him $25,000.
It should be pointed out that it could take years for the fund to generate positive returns as it may take many years to explore, find and sell minerals from the project. So it is not a free lunch and ranks in the “moderate-aggressive” to “aggressive” risk tolerance range.
The Limited Partnership moniker just means that you are limited in liability to the amount of money you have invested - i.e. you can’t be sued personally, the most you can lose is the total value of your investment. This Limited Partnership usually has a management team that will manage the money on your behalf into some specified “mandate” which is just a fancy word for describing the overall investment objective of the partnership. So for example, the mandate might be to invest in mining exploration projects - in order to find new sources of minerals for example.
Disclaimer:
ScotiaMcLeod does not actively participate in flow-through shares or make any recommendations towards investing in them. The information contained in this article is general in nature and is not intended to be considered professional tax advice. Investments should not be made for tax considerations alone. Each individual investor’s situation is unique and advice should be received from a qualified tax specialist. The example in this piece is based on a number of assumptions and is illustrative of the application of the relevant income tax provisions to a hypothetical investor. Limited Partnerships are not guaranteed, their values change frequently and past performance may not be repeated. Commissions, trailing commissions, management fees and expenses all may be associated with limited partnership investments. Neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. The contents of this information piece are for informational purposes only and are not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice.
