Links to breadcrumbs
Taxes Personal Finance FP Investor
Scott’s RRSP contributions have been replenished, but he questions whether flowshares are a viable tax-saving investment for him
A pedestrian looks at a smartphone as he stands on a corner in Toronto’s financial district. Photo by Brent Lewin/Bloomberg files
Reviews and recommendations are unbiased and products are selected independently. Postmedia may earn an affiliate commission for purchases made through links on this page.
Article content
By Julie Cazzin and Allan Norman
Advertisement 2
This ad hasn’t loaded yet, but your article continues below.
Article content
Q: I made about $300,000 last year and expect to make more this year. I maximize my contributions to my Registered Retirement Savings Plan (RRSP) every year, but I still pay a lot of taxes. My broker tells me to invest in conduit stocks, but they seem risky to me. Do you think I should invest in conduit stocks? — Scott in Brockville, Ont.
FP answers: Scott, you might be the perfect candidate for conduit stocks because of the tax benefits they bring. They are generally only available to accredited investors, i.e. someone with a minimum annual income of $150,000 or a minimum investment portfolio of $1 million.
Your broker will likely suggest conduit stocks because you get tax deductions for the full amount you invest, plus a federal and possibly state tax credit that you can use to lower your taxes. The total amount when you eventually sell your transfer shares will be taxed as a capital gain.
Advertisement 3
This ad hasn’t loaded yet, but your article continues below.
Article content
But you are right to be concerned about investment risk. In most cases, transfer shares are issued by junior mining companies. Indeed, only Canadian companies engaged in the exploration of natural resources or renewable energy can issue conduit shares.
In addition to the investment risk, the costs are high, which comes at the expense of your total profit. You are also often stuck for 18 to 24 months and you do not always know what you are buying when you make the purchase.
Some investors deal with investment risk by buying conduit stocks each year. They are expected to buy more winners than losers over time.
Another strategy for eliminating investment risk is to sell your stocks almost immediately and take advantage of the tax benefits alone. There are transfer providers that facilitate this for you.
Advertisement 4
This ad hasn’t loaded yet, but your article continues below.
Article content
FP Answers: Does it make sense to retire and invest in a farm?
FP Answers: What happens if I die before – or just after – collecting my CPP?
FP Answers: Can I retire on $48,000 a year at age 43?
These providers will make you an offer before you make a purchase. In the offer you will see the buying and selling price of the shares, the associated fees and your estimated return upon completion of the transaction. Then you decide what you want to do. This approach significantly reduces the risk normally associated with conduit stocks.
You may be wondering who (the liquidator) would buy your conduit shares? Well, a liquidator will offer you less than what you paid for the stock, meaning an immediate loss to you on your stock, but the tax benefits will remain with you and they will outweigh the stock loss.
Advertisement 5
This ad hasn’t loaded yet, but your article continues below.
Article content
The liquidator may also be able to buy the stock from you for less than what the common stock is currently trading for in the market. This allows them to maintain or increase their ownership concentration in the company.
Scott, there’s more to stock going through than what I’ve shared here, but this should be enough to give you a sense of whether you should keep researching them or not.
One other note. A conduit stock is a common stock (a stock), but you can’t buy and sell them like stocks. You will need to find a transfer provider, which is simple enough to do with a quick Google search.
Allan Norman, M.Sc., CFP, CIM, RWM, is both a fee-only financial planner at Atlantis Financial Inc. as a fully licensed investment advisor at Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This comment is intended as a general source of information and is intended for residents of Canada only.
†
For more stories like this, Sign Up for the FP Investor newsletter.
†
Share this article in your social network
Advertisement
This ad hasn’t loaded yet, but your article continues below.
Top Financial Messaging Stories
By clicking the sign up button, you agree to receive the above newsletter from Postmedia Network Inc. receive. You can unsubscribe at any time by clicking the unsubscribe link at the bottom of our emails. Postmedia Network Inc. † 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300
Thanks for signing up!
Comments
Postmedia is committed to maintaining a lively yet civilized discussion forum and encourages all readers to share their thoughts on our articles. It can take up to an hour for comments to be moderated before appearing on the site. We ask that you keep your comments relevant and respectful. We’ve enabled email notifications – you’ll now receive an email when you get a reply to your comment, there’s an update to a comment thread you’re following, or a user follows comments. Visit our Community Guidelines for more information and details about customizing your email settings.
This post FP Answers: Should I follow my broker’s advice and invest in conduit stocks?
was original published at “https://financialpost.com/personal-finance/taxes/fp-answers-should-i-follow-my-brokers-advice-and-invest-in-flow-through-shares”