How Flow-Through Limited Partnerships Provide Tax-Advantaged Exposure to Junior Mining Companies

Posted Annually as of 2021

Flow-Through Limited Partnerships are not just a tax-advantaged fiscal planning tool but a unique strategy designed for Canadians. These partnerships offer a structured way to gain exposure to Canada’s junior mining sector, combining tax efficiency with growth potential. They provide a distinct advantage, allowing investors to access early-stage resource companies without the burden of building a portfolio from scratch.

Here is an overview that explains how Flow-Through Limited Partnerships help investors tap into the opportunities of the junior mining sector while providing an avenue that maximizes the available tax credits and deductions.

Understanding Junior Mining Companies

Junior mining companies are early-stage explorers. They don’t operate producing mines, as their primary focus is discovering and developing new mineral deposits of resources such as gold, copper, nickel, lithium, Uranium and rare earth elements.

The main characteristics of these companies are:

They tend to be smaller and have lower market capitalization
Rely heavily on external financing to fund drilling and exploration activity
They are at the starting point of the mineral development lifecycle

Many of today’s most significant mining operations began as junior exploration stories. While these investments are inherently speculative, they offer exposure to high-growth potential projects in sectors aligned with long-term growth and intrinsic value trends like electrification, clean energy, defence and global infrastructure development.

The Challenge: Accessing Quality Exploration Investments

For individual investors, gaining exposure to a diversified basket of junior mining companies is difficult. The sector has exposure barriers that include:

Lack of access to private placements
Limited liquidity in the stocks
Difficulty evaluating management teams or exploration and development programs
Balance sheet health

That’s where Flow-Through Limited Partnerships come in.

What Flow-Through Limited Partnerships Do Differently

Flow-Through Limited Partnerships are structured tax-advantaged investment vehicles designed to access and manage flow-through share investments in junior resource companies on behalf of investors. A professional fund manager with extensive experience and knowledge in the mining sector sources, analyzes, administers and allocates capital to a basket of diversified companies, issuing flow-through shares while adhering to investment guidelines focused on deploying the investment in companies that qualify for the federal exploration credits.

Two key benefits of investing in Flow-Through Shares

1. Tax Deductions Through Flow-Through Shares

When companies issue Flow-Through Shares, they ‘renounce’ their Canadian Exploration Expenses (CEE) to the partnership. Companies then pass these expenses to you as an investor, allowing you to deduct them against your income, thereby reducing your tax liability.

In many cases, you can deduct over 90% of your investment amount in the first year of investment. Some provinces have additional tax credits that can further reduce your after-tax costs on a net basis.

2. Curated Exposure to Early-Stage Mining Opportunities

The investment manager of the Flow-Through Limited Partnership builds a portfolio of junior mining companies that have:

Exploration of resource assets with significant economic potential
Canadian operations
Strong exploration and development programs
A strong balance sheet
Experienced and capable management teams

These factors expose investors to a part of the market that’s often unavailable to investors without specialized knowledge or institutional access.

Why It Matters: The Tax-Adjusted Cost of Entry

One of the most compelling reasons to consider Flow-Through Limited Partnerships is its tax-advantaged benefits to reduce your effective investment cost.

When you invest in a Flow-Through Limited partnership, your tax savings could be substantial if your marginal tax rate is considerable and the partnership renounces 100% of its exploration expenses. This tactic lowers your cost base significantly while you still enjoy full exposure to the portfolio’s market value.

If one or more holdings appreciate significantly, your return is enhanced further by benefiting from the reduced after-tax entry point.

What Happens at the End of the Partnership?

Flow-through limited Partnerships typically have a lifespan of 12 to 24 months. After that period:

The partnership dissolves
You receive direct ownership of the shares it purchased
You decide whether to hold or sell

The CRA taxes any capital gains on these shares at the capital gains rate. Since the deductions reduce your adjusted cost base claimed, 100% of the sale proceeds are considered a capital gain.

Flow-Through Limited Partnerships enable you to capitalize on Canada’s mining potential strategically.

Flow-Through Limited Partnerships are especially effective at gaining access to:

Private placements that are not available to the general public
Companies with important upcoming exploration milestones
Opportunities in emerging sectors, such as critical minerals

Since specialized investment teams manage them, Flow-Through Limited Partnerships aim to:

Avoid promotional or low-quality projects
Limit overexposure to any single company or mineral
Identify investments with meaningful near-term catalysts

Investor Profile: Who Benefits Most?

Flow-Through Limited Partnerships are best suited for:

Investors or business owners with high taxable income who want to minimize their tax liabilities.
Those interested in supporting Canada’s natural resource economy
Investors seeking exposure to junior mining without self-managing a portfolio

It’s important to understand that these are speculative investments. While the tax benefits can offset some risk, investors should be comfortable with equity volatility and the dynamics of the junior sector.

Key Takeaways

Flow-through Limited Partnerships provide investors access to junior mining companies through professionally managed flow-through share portfolios.
Investors receive significant tax deductions, often in the same year of investment.
The structure simplifies access to early-stage companies and spreads risk across multiple issuers.
Upon dissolution, shares are distributed and can be held or sold, with capital gains tax treatment.
Flow-Through Limited Partnerships are a niche tax-advantaged strategy ideal for tax planning and exposure to the potential upside of the mining sector.

As with all investments, due diligence is essential. Consult your financial advisor and tax professional before participating in any offering.

Disclaimer: This article and its content do not constitute financial or investment advice and should not be considered a substitute for professional financial or tax specialist advice.