# Flow-through tax shelters and other tax shelters



## Jon Chevreau (Apr 4, 2009)

Anyone here had experience with resource limited partnership or "flow-through" tax shelters? As far I know, the Canada Revenue Agency is completely fine with these -- they "work" if you're prepared to lose capital in the underlying investment in order to reap some tax advantages: usually deferring tax liability to another year. Of course, in the best scenario, the underlying investment goes up and you win twice.

In a different category are those "buy-low, sell-high" charitable giving tax shelters, which the CRA is aggressively trying to discourage by auditing anyone who has tried them. 

I realize these tax shelters proliferate at the end of the calendar year and won't "help" anyone defray taxes due at the end of this month. But seems to me a new crop of flow-throughs will be hitting soon, some of which will sell out by the time the end-of-year rush hits.


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## Rickson9 (Apr 9, 2009)

Jon Chevreau said:


> Anyone here had experience with resource limited partnership or "flow-through" tax shelters? As far I know, the Canada Revenue Agency is completely fine with these -- they "work" if you're prepared to lose capital in the underlying investment in order to reap some tax advantages: usually deferring tax liability to another year. Of course, in the best scenario, the underlying investment goes up and you win twice.
> 
> In a different category are those "buy-low, sell-high" charitable giving tax shelters, which the CRA is aggressively trying to discourage by auditing anyone who has tried them.
> 
> I realize these tax shelters proliferate at the end of the calendar year and won't "help" anyone defray taxes due at the end of this month. But seems to me a new crop of flow-throughs will be hitting soon, some of which will sell out by the time the end-of-year rush hits.


My accountant/financial planner tried to sell my wife and I flow-through tax shelters (as well as labour-sponsored funds and other magical things). We like to pick our own securities and he wasn't able to convey any other benefit to us.


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## CanadianCapitalist (Mar 31, 2009)

I looked at this many years back when I received a large severance payment and was looking at ways to reduce taxes that year. But I decided against it for reasons I explained in this post:

*Comment on Flow-Through Funds*

Unfortunately, what the government giveth with flow-through funds, the intermediaries taketh away!


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## CanadianCapitalist (Mar 31, 2009)

Actually, it seems that flow-through funds are not selling very well now, at least according to this Globe & Mail column:

*Say goodbye to the flow-through trap*



> Today we gather to bid adieu to the flow-through share, one of the best investment traps of the last bull market.
> 
> For those who aren't familiar with the concept, the shares are a brilliant way to roll the dice on a junior resource company and get paid to do it. Well, that's the seller's pitch anyway. A better description, in retrospect at least, would be that it's an unparalleled way to lose money.


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## FrugalTrader (Oct 13, 2008)

Jon Chevreau said:


> Anyone here had experience with resource limited partnership or "flow-through" tax shelters? As far I know, the Canada Revenue Agency is completely fine with these -- they "work" if you're prepared to lose capital in the underlying investment in order to reap some tax advantages: usually deferring tax liability to another year. Of course, in the best scenario, the underlying investment goes up and you win twice.
> 
> In a different category are those "buy-low, sell-high" charitable giving tax shelters, which the CRA is aggressively trying to discourage by auditing anyone who has tried them.
> 
> I realize these tax shelters proliferate at the end of the calendar year and won't "help" anyone defray taxes due at the end of this month. But seems to me a new crop of flow-throughs will be hitting soon, some of which will sell out by the time the end-of-year rush hits.


I've recently had a guest writer talk about how he maximizes his charitable donations by using flow through tax shelters.


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## ethos1 (Apr 4, 2009)

Jon Chevreau said:


> Anyone here had experience with resource limited partnership or "flow-through" tax shelters? .


I have been doing super flow throughs (SFT) for many years - love them, CRA has zero issues

Of the ones that I have done, on maturity they have returned on average 90% of the original investment

Take the write off's, then on maturity roll the money into more SFT's or RRSP's 

If you have capital losses from previous years, then these are good to have, other than that on expiry you need to deal with the capital gain and can benefit as I said by rolling the money into RRSP's or more SFT's or as FT said charity


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## Jon Chevreau (Apr 4, 2009)

Here's a column this weekend that touches on this topic:

http://www.financialpost.com/story.html?id=1532341


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## ethos1 (Apr 4, 2009)

Jon Chevreau said:


> Here's a column this weekend that touches on this topic:
> 
> http://www.financialpost.com/story.html?id=1532341


covers the basics - nice


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## Robillard (Apr 11, 2009)

*Labour Sponsored Investment Funds*

I worked briefly for a company that manages a bunch of LSIFs. I'm not sure whether they make a great tax planning investment or not. Depending on the province in which the fund is registered, you might get (I think they are refundable) provincial and federal tax credits of up to 35%, in addition to any benefit from holding the shares in an RRSP. 

Unfortunately, LSIFs occupy a niche segment of the market, and the management companies charge exorbitant management fees, effectively extracting some of the investor's tax gains. Furthermore, they have a bad reputation because during the heyday of LSIFs, too many companies decided to offer them, and too many were chasing too few good opportunities. The result was investors losing lots of money. These days, there isn't much competition, and LSIF management companies can get away with charging high management fees. For example, the GrowthWorks Canadian fund has a stated management fee of 2%, but you might notice that Morningstar says the fund's MER is 5.5%, which is ridiculously high. 

In addition to high fees, some investors may get burned by the sizable trailer fees (though they are not overly crazy relative to other mutual funds), which can range from 0.5% to 1% of the fund's value; these go to the advisors that sold the funds. Some employ an 8-year deferred sales charge on the commission portion (with the investor surrendering their tax credits if they redeem early), while other simply cannot be sold before maturity. 

I wouldn't say that LSIFs are bad investments, but the the managers and salespeople seem to get a sizable chunk of the pie.


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## ethos1 (Apr 4, 2009)

Robillard said:


> I worked briefly for a company that manages a bunch of LSIFs. I'm not sure whether they make a great tax planning investment or not. .


in Ontario & for me LSIF's were not a good deal



> I wouldn't say that LSIFs are bad investments, but the the managers and salespeople seem to get a sizable chunk of the pie.


I would agree & also say LSIF's are a totally different tax deferred vehicle to Flow Through shares (FTS)


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## Jon Chevreau (Apr 4, 2009)

Mostly, LSIFs are limited by the relatively small amount you can put in them every year, whether $5,000 or a little more in some places. Only so much damage you can do to yourself, damage offset somewhat by the tax credits. 

There IS no limit with flow throughs, which means you could overconcentrate your whole portfolio -- in theory -- in junior Canadian resource plays.


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## joes_k (Apr 29, 2009)

*Some good .. some bad*

I've purchased both the resource flow thrus as well as the Labour sponsored vehicles.

Generally my experience with LSIF's has been bad, with capital losses (even before the market correction) far outstripping any tax write offs. Worse still you are locked in for (correct me if I'm wrong) seven years or you are forced to take a huge penalty for early withdrawals. I will never buy them again.

I've had mixed success with the resource flow thrus, thanks mostly to the oil market taking off at precisely the right time. If you are in a high tax bracket they make some sense.

If I were to purchase another I would stick with the larger managers, Middlefield or NCE/Sentry, for two reasons. First I have had decent success with them; second because they usually have two year sunset provisions. So when the vehicle matures the manager does not in fact cash you out but you get converted into a mutual fund. Being with a larger manager gives you more options on exit, sell the mutual fund, stay in the fund usually a resource fund or convert into another fund ie money market, etc. The larger manager will have funds in the same "tax class" that allow you to transfer without incurring the tax consequences of selling.

Of course the outright sale triggers tax consequences. These can be mitigated if you wish to donate your funds to a charity.


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