FP Answers: Should I follow my broker’s advice and invest in flow-through shares

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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 numerous tax. My dealer says I ought to put money into flow-through shares, however they appear dangerous to me. Do you suppose I ought to put money into flow-through shares? — Scott in Brockville, Ont.

FP Solutions: Scott, you might be the proper candidate for flow-through shares due to the tax advantages they bring about. They’re typically solely out there to accredited buyers, 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 total quantity you make investments, plus a federal and doable provincial tax credit score you should use to cut back your taxes. The overall quantity once you ultimately promote your flow-through shares can be taxed as a capital acquire. 

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

Along with the funding danger, the charges are excessive, which is able to reduce into your general good points. You’re additionally typically locked in for 18 to 24 months, and also you don’t all the time know what you might be shopping for once you make the acquisition.

Some buyers cope with the funding danger by buying flow-through shares each yr. The expectation is that they may buy extra winners than losers over time. 

One other technique to eradicate the funding danger is to promote your shares virtually 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 suggestion earlier than you make a purchase order. Within the provide, you will note the acquisition and promoting worth of the shares, the related charges and your estimated return upon completion of the transaction. Then you definitely resolve what you need to do. This method considerably reduces the chance usually related to flow-through shares.

It’s possible you’ll be questioning who (the liquidator) would buy your flow-through shares? Effectively, a liquidator goes to give you lower than what you paid for the shares, which suggests a direct 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 presently buying and selling for available on the market. This permits 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 research them or not.

Only one different observe. 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 straightforward 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 totally licensed funding adviser with Aligned Capital Companions Inc. He might be reached at www.atlantisfinancial.ca or [email protected]. This commentary is supplied as a common supply of knowledge and is meant for Canadian residents solely.

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