2 KOOTENAY MONEY | FALL 2016
“Dedicated to the furtherance of finance literacy and well-being.”
TAXES? HECK, THAT’S YOUR MONEY!
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PUBLISHER’S MESSAGE
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axes are an unpleasant feature of life but as everyone knows, are unavoidable. Income streams generated in Canada, or monies entering the country from overseas, will inevitably attract the attention of Canada Revenue Agency. What to do? As advisors in the financial sphere, it is our job to ensure our clients do not pay more than their fair share of taxation. Hence this special taxation issue. With the end of the year in view, the opportunity to reduce taxable income through the financial strategies we examine such as the flow-through limited partnership and the health spending account, not to mention preparing for the tax changes to annuity income, the topic is timely one.
compelled to pay the necessary penalties. Rather, we advocate tax mitigation, which is perfectly legitimate and means operating within the tax regime to legally reduce the amount of taxation you are subject to. Our readers may be surprised to learn that as a well-known candidate in the upcoming U.S. presidential election has pointed out, they have a responsibility to pay as little tax as legally possible! The process we engage in to make this possible is based upon Canada’s tax laws and is called tax planning. This involves lowering your tax charges by structuring your transactions so you gain the greatest tax benefit possible. It’s not only legal; it’s also possible and it’s the smart thing to do, for yourself, your family, your business and your financial future in general.
Saving you taxes is a positive goal in itself, but we at Septen Financial have a broader purpose. Those savings can be funneled right back into income-producing investments or the type that steadily augment in value. In short, our tax-saving proposals are part of our wealth creation cycle and its true beauty lies in the fact these investments won’t cost you extra; they will be financed out of your income flow that would go to taxes. At Septen it has been our pleasure to reduce the tax burden of individuals and businesses across the country with the consequence they have thrived and remain our clients.
When all is said and done, it’s your hard-earned money and you have the right to maximize what is left after having paid your fair share to the tax authorities. And what better way to treat this money, wrested from the hands of the taxman, than to redirect it toward a vehicle that can produce more wealth? Monies saved in this fashion are best viewed as a windfall, a bonus, if you will, that is separate from your regular and expected cash flow and spending. Conventional wisdom tells us to protect such windfalls by saving and investing them for a rainy day, for education, and also for retirement.
Note that we are not speaking of tax evasion, which is a crime and includes hiding income from the CRA, not filing your tax returns, keeping two sets of books, making false entries on your tax form or claiming expenses or tax credits you aren’t entitled to. Such activities will label you as a tax evader and fast-track you to being audited and
The strategies referred to above and dealt with in this issue will appear unfamiliar to many since they are not the tools of bookkeepers of even accountants. They are, however, very much our working tools here at Septen Financial and we cordially invite you to contact us to see how they might work on your behalf.
FLOW-THROUGH LIMITED PARTNERSHIPS EXPLAINED
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Charles Duerden Septen Financial
he Flow-Through Limited Partnership is a uniquely Canadian tax innovation that has raised funds for mineral exploration that otherwise simply would not have happened. Every year, billions of dollars are raised for mining operations through these Partnerships that ensure this vital sector – and the larger Canadian economy – keeps ticking over. They have been responsible for some of the most stunning developments in Canadian mining history, among them the Ekati and Diavik diamond mines in the Northwest Territories.
these companies to issue flow-through shares to raise exploration capital, but rather than claim the CEE for themselves, they renounce it as they are permitted to do under the Income Tax Act, in favour of shareholders of flow-through limited partnerships. Contact your Septen Financial Representative for more details.
Their incredible success on the Canadian investment scene over the last 60 years is due to the fact that besides exposing investors to the upside potential that has driven Canadian resource exploration since its inception, they also “flow through” their qualifying exploration and development expenses to investors who can write them off directly against their taxable income. So what do Flow-Through Limited Partnerships do? Short answer: they invest in junior mining companies to provide the necessary operating capital for them to continue their exploration. The “Partnership” in the title refers to the legal relationship between the general manager of the Partnership on the one hand; and on the other, the Investor, who becomes a limited partner in the Flow-Through Partnership. More detailed answer: they provide active professional management of a resource portfolio, diversified to reduce risk; offer significant investment benefits; and reward the investor with important federal and/or provincial tax concessions. Here’s a quick summary of what flow-through limited partnerships offer the investor: • Professional management • Potential for capital appreciation • Reduction in current taxable income • Tax deferral and benefiting from capital losses • Diversification So how did this all start? Back in 1954, the Liberal government of Prime Minister Louis Saint-Laurent was looking for a way to jump-start the Canadian resource sector as the whole economy fell into a sharp slump that marked the end of the Korean War. The solution the mandarins of the time came up with was the flow-through share, a device that relied on the tax system and internal stimulus rather than factors external to Canada. In particular, the government allowed for the transfer of tax deductions between companies to boost the funding of Canadian mineral exploration projects. Mining, oil and gas companies could transfer certain exploration expenses to their investors, who were then able to deduct them against their own resource income. The system worked generally well but was not without its limitations. By the early 1980s, in the face of a worldwide recession that hit it hard, the resource industry started to demand further tax incentives to encourage exploration and development. In response, the federal budget of April 1983 allowed certain investors to deduct exploration expenses (and related depletion allowances) against any type of income as opposed to strictly resource income. The upshot was that the use of flow-through investments among resource companies became popular and exploration activity went into overdrive. For the second time in as many generations, the tax system had come to the aid of the resource sector. Every Canadian resource company, whether its business be in oil, gas, mining, base metals or even renewable energy, may fully deduct specific exploration expenses. This is known as the Canadian Exploration Expense (CEE). It has become commonplace for
WALID AT WORK! A new employee has recently joined the staff of the Kelowna office of Septen Financial. Walid Khalfallah, a 20-year old client of Pathways Abilities Society, has been working part-time for the last two months on a long-overdue filing project. In this time, he has won our admiration for his diligence and perseverance. Way to go, Walid!
“Dedicated to the furtherance of finance literacy and well-being.”
Issue 2 · Fall 2016
Septen Financial Ltd. 778.753.2020 PUBLICATION
STEPHEN HILL Publisher ROBERT EGER Executive Editor CHUCK DUERDEN Managing Editor CHASE JESTLEY Creative Director NEXT ISSUE INC. Distribution
The editorial offices of Kootenay Money are located at 203 Rutland Plaza, 125 Highway 33 East Kelowna, Canada, BC V1X 4G7 Phone (778) 753 2020 Email kelownainfo@septen.com Fax (778) 753 5090 Toll-free 1 (844) 385 2020