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Marquest Asset Management Flow-Through LPs

Marquest Asset Management Flow-Through LPs

 

What are Flow-Through LP’s

A flow-through limited partnership is an investment vehicle that enables investors to own an equity interest in a portfolio of flow-through shares of Canadian resource companies rather than of just one company.

Junior to Mid-size Canadian resource companies obtain special tax deductions for certain exploration and development expenses that flow through the limited partnership to investors, who receive up to a 100% tax deduction for the amount invested. Typically, after 12-24 months, assets of flow-through limited partnerships rollover on a tax-deferred basis in exchange for redeemable units or shares of a resource-based mutual fund of equal value.

What are Flow-Through Shares

Flow-Through shares are issued by mining or oil & gas resource issuers to finance their exploration and development activities in Canada. In return, these resource issuers agree to transfer expenses called Canadian Exploration Expenses (CEE) or Canadian Development Expenses (CDE) to investors who can claim them as tax deductions against taxable income.

Flow-Through shares are usually issued as private placements with a minimum holding period of 4 months. These shares differ from treasury shares due to the tax benefits from CEE and CDE. Investors may see capital appreciation in the event of successful exploration and development activities.

How Flow-Through Partnerships work

Flow-through limited partnerships provide the same tax benefits as directly investing in flow-through shares. The amounts invested are generally fully deductible against taxable income in the year the investment is made.

Investors purchase units of a flow-through limited partnership and the net proceeds are used by the limited partnership to purchase flow-through shares from a variety of resource companies. The resource companies in turn relinquish their CEE rights to the limited partnership, which then allocates the CEE to its investors. The limited partnership investors can then deduct the CEE credits against their income.

Most flow-through limited partnerships have a life span of one to two years, enough time to allocate most of the tax deductions to investors. The adjusted cost base of the units (ACB) is reduced by the tax deductions and increased by any capital gains from the investments sold within the limited partnership portfolio. Those capital gains are allocated to investors annually.

At dissolution, the flow-through limited partnership unitholders receive shares of a mutual fund and the rollover transaction is completed without triggering any immediate tax liability. This allows investors the option to defer their tax liability further, until they redeem their mutual fund shares.

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