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About Flow-Through Limited Partnerships

What is a Flow-Through Share?
Flow-Through shares are a well-known source of financing for oil & gas, energy and mining resource companies. Like RRSPs, flow-through shares are one of the last officially sanctioned tax-advantaged investments still available to investors. Flow-through deductions are formally recognized in the Income Tax Act and were first introduced to the Canadian tax system in 1954 to assist in the financing of exploration projects in Canada. To further encourage the development of natural resources, the April 1983 federal budget allowed individual investors to claim exploration expenses as a deduction against any source of income.

Flow-through shares are common shares purchased from the treasury of a resource company. Flow-through shares are similar to other common shares issued by a company, with one notable exception: the proceeds from flow-through shares must be spent on qualified resource exploration. Once the money is spent, the resource company is permitted to “flow-through” these expense to the investor, who can use these deductions against personal income. The net cost of these flow-through shares to investors (also referred to as “money at-risk”) is considerably lower than the purchase price of the shares after factoring in the tax savings. In addition to saving taxes, the investor will eventually receive mutual fund shares, which can be retained as an ongoing investment for seeking additional long-term gains.

What is a Flow-Through LP?
Limited partnership structures allow investors to “pool” their money and utilize professional management to review and select those resource companies with strong management and good upside potential. Terra’s limited partnership structure also provides more diversification than other funds because it invests in both the energy & mining sectors. To learn more about Flow-Through LPs, please see Terra’s Flow-Through Brochure. For more information about Terra’s current offerings please see the Short-Term Flow-Through LP, Terra 2017 Short-Term Flow-Through LP.

What are the Tax Advantages of Flow-Throughs?
There are 3 main benefits to flow-through limited partnerships:
1. Attractive tax savings today for reducing taxes
2. Favourable capital gains tax treatment on the future investment value
3. Potential for future investment gains.

The combination of tax savings today and capital gains tax treatment in the future provides investors with two significant benefits:
---1. Lower net investment cost; and
---2. Lower tax rate on future investment proceeds

Essentially, the investor receives a tax deduction at the highest marginal tax rate today and pays a lower capital gains tax rate on the future value of the investment. Because of this favourable tax treatment, investors should consider the net after-tax return as a representative indicator of overall performance.

 
 
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