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Scott’s RRSP contributions have been topped up, however he wonders whether or not flow-shares are a viable tax-saving funding for him
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By Julie Cazzin and Allan Norman
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Q: I made about $300,000 final yr and anticipate to earn extra this yr. I maximize my contributions to my registered retirement financial savings plan (RRSP) yearly, however I’m nonetheless paying plenty of tax. My dealer says I ought to put money into flow-through shares, however they appear dangerous to me. Do you assume I ought to put money into flow-through shares? — Scott in Brockville, Ont.
FP Solutions: Scott, you might be the right candidate for flow-through shares due to the tax advantages they carry. They’re typically solely out there to accredited traders, which means somebody with a minimal annual earnings 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 total quantity you make investments, plus a federal and potential provincial tax credit score you should use to scale back your taxes. The overall quantity if you ultimately promote your flow-through shares will likely be taxed as a capital achieve.
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However you’re proper to be involved concerning the funding threat. Most often, flow-through shares are issued by junior mining firms. Certainly, solely Canadian firms engaged within the exploration of pure assets or renewable vitality can situation flow-through shares.
Along with the funding threat, the charges are excessive, which can lower into your general beneficial properties. You’re additionally usually locked in for 18 to 24 months, and also you don’t all the time know what you’re shopping for if you make the acquisition.
Some traders take care of the funding threat by buying flow-through shares each yr. The expectation is that they are going to buy extra winners than losers over time.
One other technique to get rid of the funding threat is to promote your shares nearly immediately and capitalize solely on the tax advantages. There are flow-through suppliers that can 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 supply, you will notice the acquisition and promoting worth of the shares, the related charges and your estimated return upon completion of the transaction. Then you definately resolve what you need to do. This strategy considerably reduces the chance usually related to flow-through shares.
Chances are 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’ll 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 frequent shares are at present buying and selling for in the marketplace. This enables them to take care of 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 ought to be sufficient so that you can get the sense of whether or not it is best to proceed to research them or not.
Only one different notice. 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 might be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is supplied as a common supply of knowledge and is meant for Canadian residents solely.
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