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Flow Through Limited Partnerships (What do they really offer), Part 3
By: Bernie Doyle - Investment Advisor / Flow-through investing specialist
June 9, 2010
The idea of investors “pooling” capital together into a common investment vehicle goes back to 1774 in Europe. In Canada mutual funds found their legs in the 60’s and from $1B invested in ’63 the idea of a managed fund has now blossomed to over $450B in assets under management. There are two main reasons behind this dramatic growth.
1. Diversification, and all of its benefits i.e. Lowering of risk, more exposure to an industry, variety of holdings in the fund…
2. Professional Management.
A dedicated portfolio manager along with researchers and analysts oversees the holdings in a portfolio. With the complexity of todays markets its small wonder that people flock to diversified portfolio offerings that are under the auspices of a puissant industry professional. Albeit the current market turmoil has spawned a significant rise in discount brokerage accounts being opened, where investors are taking at least some control back into their own hands and making their own picks of who to invest in.
Exchange traded funds are currently experiencing a boon because they offer two main features to the DIY investor.
1. Diversification of holdings (yet again)
2. The ability to get into and out of the market without big upfront or backend costs of subscription that exists with some mutual funds.
Alas ETF’s tend to favor those who day trade, which can be a little demanding on one’s time if you have other things to do.
Getting back to Flow-through shares, there is a blend of some of the features mentioned above available to the individual investors. Known as a flow through Limited Partnership. This vehicle represents the best of all worlds.
1. 100% tax deduction
2. Professional Management
3. Diversification
By professionally selecting a basket of stocks (the portfolio) of FLOW THROUGH eligible shares, an investor enjoys the dual benefits of,
1. Greater exposure to the mining industry
2. Lower risk due to diversification
That’s a pretty good deal, especially when it is all wrapped up in 100% tax deduction. The term “Limited Partnership” holds a few specific characteristics. For brevity we’ll look at the most salient points.
A Flow-through Limited Partnership (FTLP) will almost exclusively invest all investable proceeds into shares that have the “flow-through” designation.
This means that all of the investment becomes 100% tax deductable. Because the FTLP is making the purchase of the Flow through shares on your behalf they will then pass on to you all the necessary information for you to put onto your T1. This is perhaps the biggest secret of the whole matter. There is a specific location on everyone’s (including yours) T1 where you can put in your amount for 100% tax deductable Canadian Exploration Expenses. It’s right there on your tax form. Sadly most folks have not availed themselves of this knowledge.
There are other associated documents that are also required but the processing of the tax deduction is clear and straight forward when supported with the figures that the Limited Partnership is obliged to supply to you. At least now you know its there and what you need to do to get the deductions.
But back to FTLP’s. The different parts of a FTLP look like this: First there are the General Partners who oversee the whole thing including management of the fund, distribution, making sure all the activities of the General Partnership and the Limited Partnerships are adhering to the prescribed laws and by-laws of the Ontario Securities Commission (or applicable Provincial Regulator). It’s common for General Partners to open up one FTLP each year and in the case of the larger offerings they may open up a second Limited partnership later in the year. The issue of a FTLP usually takes place through one of two vehicles:
1. Offering Memorandum
2. Prospectus.
The Offering Memorandum (OM) or the Prospectus is the full and plane description of the General Partners and the Objectives of the Limited Partnership. There are slight differences between the two, but the main one is that the Offering Memorandum is for “accredited investors”. Look for the fourth and final part of this topic next week on AllPennyStocks.com.
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Bernie Doyle is an Investment Advisor specializing in Flow-through shares and Flow-through Limited Partnerships.
You can contact him at TaxDeductions@FlowThroughCanada.com
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