A Little-known Tax-Incentive - DOUBLE TAX DEDUCTION
by Brahma S. Varma, President, Pro-Financial Planners Ltd.
(Surrey, BC, Canada, 604-585-7656)
For many years, the rich individuals and businessmen have been saving their income-tax by up to 50% by using a little known tax-incentive offered by the federal and provincial governments. It is known as Flow-Through shares, or FTSs. Currently, FTSs are being offered by (1) Oil & Gas exploration companies, and (2) Companies dealing with mining corporations The following information on FTSs has been taken from the CRA (Canada Revenue Agency) website:
HOW does the flow-through share (FTS) program work?
1. FTS is available to Individuals, trusts, corporations, and partnerships.
2. The principal-business corporation (PBC) issues the Flow-Through Shares. There is a written flow-through share agreement between the investor and the corporation.
3. PBC can renounce two kinds of expenses to the investors:
• Canadian exploration expenses (CEEs) deductible up to the maximum of 100%; or
• Canadian development expenses (CDEs), deductible up to the maximum of 30%.
4. FTS investors may benefit from:
• Income-tax deductions through renounced expenses;
• An investment tax credit (ITC) on flow-through mining expenditures for individuals; and
• Amounts renounced to the partnership which can be allocated to the partners.
Note: Information on MTS may be available from any CA or CPA.
Financial Planners or mutual fund brokers (even the banks) may not be able to help you
WHO can benefit from Flow-through shares?
o Individuals, companies or partnerships with high income, generally, need deductions to reduce their income-tax.
o If someone has sold a capital property, he can use FTSs to reduce the Capital Gains Tax
How much income-tax can you save using FTSs?
On his $100,000 investment, a BC resident in the top marginal tax-bracket of 43.7% will save $43,700 in income-tax. Plus on a mineral FTS, he will get 15% non-refundable federal tax credit (approx. $13,500). Some of the shares could be eligible for 20% BC provincial tax credit. After deducting 10% FTS Offering Costs, his net tax-savings would be $40,000 to $50,000.
Note: After a few months, many mining company FTSs transfer ownership of mining company shares to the investors. He can either sell them and take his money out, or make an in-kind RRSP transfer, and claim RRSP deduction for more tax-savings.
To know more, visit the following websites:
www.mtaxflowthrough.com and www.gorogerscanada.com
Oil & Gas exploration FTS can provide DOUBLE TAX DEDUCTION.
Since, RRSP contribution made until March1, 2010 can be applied towards your 2009 tax return you can claim both (1) the FTS deduction and (2) RRSP deduction in the same year. For example, you invest $10,000 in Oil & Gas exploration FTS this year and make an in-kind transfer to RRSP before March 1, 2010, you will can claim the Double Deduction from your 2009 income.
How it works?
You want to claim $20,000 tax deduction from your income but you have only $10,000 scope for RRSP contributions this year. Under this plan,
1. you would buy $10,000 FTSs to claim Oil Exploration Tax Deduction.
2. Later, the FTS can be transferred into your self-administered RRSP account. Your trustee will provide you a receipt for RRSP Tax Deduction.
This way, you will be able to deduct $20,000 from your income for a single $10,000 investment.
FTS deduction + RRSP deduction = DOUBLE TAX DEDUCTION
Why contribute to RRSP only when you can get the Double Tax Deduction?
Remember, at 40% marginal tax-rate, $1 in income-tax is equivalent to earning $1.67.
In the above example, using double tax-deduction of $20,000, you would save $8,000 in income-tax which means pre-tax earnings of $13,360