Frequently Asked Questions
What are flow-through shares?
Flow-through shares are like any other common share issued by a company, except they also provide tax benefits to the purchaser. A flow-through share is available to mining, petroleum and certain types of renewable energy companies to facilitate financing their exploration and project development activities. In return for receiving these funds, the resource company has the obligation to “flow-through” to the purchaser of the flow-through shares the tax deductions it receives upon spending the funds on qualifying exploration and development activities. Except for these initial tax benefits, flow-through shares are indistinguishable from all other common shares of company.
What is a flow-through limited partnership?
A flow-through limited partnership enables investors to own an equity interest in a portfolio of flow-through shares of Canadian resource companies rather than of just one company.
Canadian resource companies receive special tax deductions for certain exploration and development expenses that flow through the limited partnership to investors, who receive up to a 100% tax deduction for the amount invested. Typically, after a period of 18-30 months, assets of flow through limited partnerships roll over on a tax-deferred basis in exchange for redeemable units or shares of a resource-based mutual fund of equal value.
What type of companies can issue flow-through shares?
Companies actively engaged in oil and gas or mining exploration or development and certain alternative energy projects are qualified to issue flow-through shares. Typically, Maple Leaf Short Duration Flow-Through Limited Partnership will focus its investment capital on a diversified portfolio of mining and oil and gas exploration, development and/or production companies and to a lesser extent renewable energy companies. Maple Leaf's Portfolio Manager, Jim Huang sees many opportunities for investment in resource companies formed by experienced and successful oil and gas executives who have excellent track records in creating shareholder value.
Why buy a portfolio of flow-through shares?
Buying a professionally managed portfolio of flow-through shares, rather than shares in a few individual companies, reduces the risk inherent in owning only a few stocks through diversification. In addition, Jim Huang, Maple Leaf Short Duration Flow-Through’s Portfolio Manager, is an experienced “institutional investor” and has established industry relationships with many of the companies that issue flow-through shares and many of the investment dealers that manage flow-through share offerings. A Maple Leaf Short Duration Flow-Through Limited Partnership therefore, often will have access to flow-through share offerings that are not available to the individual investors or their advisors.
Are the tax benefits legitimate?
Yes! The tax benefits associated with flow-through shares are well-accepted in Canada and have been in place through legislation since 1954. The other consideration with Maple Leaf Short Duration Flow-Through Limited Partnership(s) is that the funds invested stay in Canada to be used to create genuine and valuable economic activity and growth within Canada’s mining and energy sector. Further, the tax deductions are only available to those people who pay Canadian taxes. The Partnership and General Partner receive a tax opinion from their legal and tax advisors on the structure (please refer to the prospectus of the offering to which you are considering an investment in for the full text on this opinion).
What are the risks?
Perhaps the most significant risk is that the resource sector has typically been cyclical. This said, resource stocks generally have this fact inherently embedded in their share price. One factor to remember is that with the tax deductions, investors may have a lower effective net at-risk capital amount of only 50% to 52% of the cost of the investment (based on the minimum offering) than investors in a conventional portfolio of resource securities (please refer to the preliminary prospectus of the Limited Partnership to which you are investing to view the “Risk Factors” associated with an investment in Partnership units).
What corporate activities qualify for flow-through shares?
The government of Canada has stringent requirements that must be met in order to determine whether an activity is classified as development or exploration in nature; the key difference being the amount of write-off allowed in the first year. Exploration and certain development activities can typically be written off at 100% in the first year whereas development expenses are written off over a period of five years. The companies to which Maple Leaf Short Duration Flow-Through Limited Partnerships invest in have experience in determining which classification of activity they are spending flow-through proceeds, and the investment agreements with these companies will require them to spend the funds as agreed.
What is ACB (Adjusted Cost Base)?
The adjusted cost base or “ACB” of a share is generally what you paid for it. Once you realize the tax deductions from flow-through shares, you are deemed to have an adjusted cost base (ACB) of nil due to the receipt of the tax benefits, which will approximately equal your original investment amount. A nil adjusted cost base means that when you calculate your capital gains on your investment when you sell it, you treat your adjusted cost base as zero; however only half of the capital gain is taxable.
What is 'Short Duration Flow-Through'?
Short Duration flow-through is simply a flow through fund that provides investors with the opportunity to realize daily liquidity earlier than traditional flow through funds. Traditional flow through funds typically rollover to their mutual funds and thereby provides liquidity to investors after a mandatory hold period of 18-30 months from the date of original investment. Maple Leaf has committed to roll over and provide liquidity within 12 months of the original investment.
What are the benefits of Short Duration Flow Through?
There are many significant tax and wealth planning strategies inherent in short duration flow through investing. The key strategy and benefits to short duration flow through is the ability to liquidate annually and to annually re-invest the capital into another flow through limited partnership thereby realizing a second 100% tax deduction, with the original investment capital, one year earlier than the time frame that traditional flow through funds typically offer their investors. Further, this early liquidity option allows investors to annually convert income to the much more favorable rates applied to capital gains - essentially reducing tax rates by 50%. Other benefits include accelerated charitable giving, accelerated contributions to RSP and RESP and TFSA's and the ability to pay down mortgages and other debts earlier with either the extra tax savings or with the capital from liquidation.
How much is my tax deduction for the tax year in which I invest?
The partnerships intend to invest 100% of available funds in flow-through shares. Therefore, the expected tax deduction for a limited partner in the year of purchase is approximately 93% of the amount invested with the balance of 7% deductible over the following four years. Because of these anticipated tax deductions, investors may be able to reduce their effective net at-risk capital to approximately 54% of their original investment (please see the prospectus for the relevant partnership for a full description of these calculations).
How and when do I receive my T5013A tax slip?
Prior to the end of April of the year following the purchase of your flow-through investment, you will be mailed a T5013 federal tax receipt form from your investment dealer.
What about my capital losses from other investments?
If you sold investments and created a capital loss that you have not yet claimed, it can be carried back three years and forward indefinitely. This allows you to offset other capital gains against these losses, thereby reducing the tax you pay. The capital gains resulting from the sale of your investment, can be offset against any unused capital losses you may have.
Are there enough quality resource companies issuing flow-through shares?
Yes! Canadian resource companies undertook significant exploration and development activities as relatively strong commodity prices have encouraged the exploration and development of resource assets. Mr. Jim Huang, the Partnership’s Portfolio Manager, believes that this robust level of activity bodes well for continued demand by Canadian resource companies for flow-through equity funding. Financing exploration and development opportunities by way of flow-through share issuances enable resource companies to maximize their opportunities in a strong commodity price environment while maintaining low levels of debt.
What will your investment focus be - oil and gas, mining or alternative energy?
The partnership will invest 100% of its available funds in mining and energy exploration, development and/or production companies and to a lesser extent alternative energy companies. The Partnership’s Portfolio Manager, Jim Huang will weigh the portfolio based on industry trends and investment opportunities available to the Partnership. It is anticipated that the Portfolio will initially hold a relatively balanced weighting of mining and energy stocks.
Who manages the flow-through portfolio?
T.I.P. Wealth Manager Inc. (“T.I.P.”) will act as Portfolio Manager to Maple Leaf Flow-Through Limited Partnership and will be responsible for the Partnership’s investment activities. Mr. Jim Huang, the President of T.I.P. will act as Portfolio Manager on behalf of T.I.P. Mr. Huang has over 14 years of investment experience and was a Vice-President and Portfolio Manager at NATCAN Investment Management Inc. and its predecessor Altamira Management Ltd. While working as lead or co-manager at Altamira, Mr. Huang managed or co-managed over $2 billion in mutual funds and institutional asset, including all of the resource and equity income products in the Altamira and National Bank mutual fund families. Altamira Energy Fund, Altamira Resource Fund, Altamira Precious and Strategic Metals Fund and Alta Fund (a Canadian Equity fund focusing on Western Canada) had industry-leading performance, won awards and had positive press coverage under Mr. Huang’s Management. In addition, Mr. Huang has experience managing the portfolio’s of flow-through limited partnerships and other resource funds, having acted as Investment Advisor for Rhone 2004 Flow-Through Limited Partnership, Rhone 2005 Flow-Through Limited Partnership, Alpha Energy 2006 Flow-Through Fund, First Asset Energy & Resource Income & Growth Fund and First Asset Energy and Resource Fund, as well as other privately offered flow-through investment vehicles.
Can Corporations benefit from buying flow-through?
Yes, corporations have the same advantages buying flow-through as does the individual investor. To view the advantages specific to your province please visit our Tax Planning For Corporations page.
What happens after the Limited Partnership is rolled over into the Mutual Fund?
After the mutual fund rollover transaction is implemented the Limited Partnership will be dissolved. The Limited Partners will then receive redeemable shares of the Mutual Fund of equal value on a tax deferred basis.