FP Solutions: Ought to I comply with my dealer’s recommendation and spend money on flow-through shares

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By Julie Cazzin and Allan Norman

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Q: I made about $300,000 final 12 months and anticipate to earn extra this 12 months. I maximize my contributions to my registered retirement financial savings plan (RRSP) yearly, however I’m nonetheless paying quite a lot of tax. My dealer says I ought to spend money on flow-through shares, however they appear dangerous to me. Do you suppose I ought to spend money on flow-through shares? — Scott in Brockville, Ont.

FP Solutions: Scott, chances are you’ll be the proper candidate for flow-through shares due to the tax advantages they create. They’re typically solely obtainable to accredited traders, which means somebody with a minimal annual revenue of $150,000 or a minimal funding portfolio of $1 million.

Your dealer is probably going suggesting flow-through shares since you’ll get a tax deduction for the complete quantity you make investments, plus a federal and potential provincial tax credit score you should utilize to scale back your taxes. The full quantity if you ultimately promote your flow-through shares will probably be taxed as a capital acquire. 

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However you might be proper to be involved concerning the funding threat. Most often, flow-through shares are issued by junior mining corporations. Certainly, solely Canadian corporations engaged within the exploration of pure assets or renewable power can difficulty flow-through shares.

Along with the funding threat, the charges are excessive, which can reduce into your general features. You’re additionally usually locked in for 18 to 24 months, and also you don’t at all times know what you might be shopping for if you make the acquisition.

Some traders cope with the funding threat by buying flow-through shares each 12 months. The expectation is that they may buy extra winners than losers over time. 

One other technique to get rid of the funding threat is to promote your shares nearly instantly and capitalize solely on the tax advantages. There are flow-through suppliers that may facilitate this for you.

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These suppliers will current you with a proposal earlier than you make a purchase order. Within the provide, you will notice the acquisition and promoting value of the shares, the related charges and your estimated return upon completion of the transaction. Then you definitely resolve what you wish to do. This method considerably reduces the danger usually related to flow-through shares.

It’s possible you’ll be questioning who (the liquidator) would buy your flow-through shares? Properly, a liquidator goes to give you lower than what you paid for the shares, which suggests a right away loss for you in your shares, however the tax advantages will stay with you, and they’re going to overcome the inventory loss. 

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The liquidator can also be capable to buy the shares from you for lower than what the widespread shares are at the moment buying and selling for available on the market. This enables them to keep up or develop their possession focus within the firm.

Scott, there’s extra to flow-through shares than what I’ve shared right here, however this needs to be sufficient so that you can get the sense of whether or not you must proceed to analyze them or not.

Only one different word. A flow-through share is a standard share (a inventory), however you may’t purchase and promote them like shares. You’ll have to discover a flow-through share supplier, which is simple sufficient to do with a fast Google search.

Allan Norman, M.Sc., CFP, CIM, RWM, is each a fee-only monetary planner with Atlantis Monetary Inc. and a completely licensed funding adviser with Aligned Capital Companions Inc. He will be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is supplied as a basic supply of data and is meant for Canadian residents solely.

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