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Investors seeking high after-tax returns should consider resource tax shelters

by Wayne Cheveldayoff, 2005-03-10

Resource tax shelters have produced great after-tax returns for investors in the past five years and more of the same is likely in the next couple of years as energy and metals prices are expected to stay high.

If you have topped up your RRSP, paid off your mortgage, tucked away some money for emergencies and still have funds available for investment, you may want to take a close look at the nine resource tax shelters introduced since January.

An example is the Canada Dominion Resources 2005 Limited Partnership, which has recently filed a prospectus at seeking to raise $100 million from investors (minimum $5,000 investment).

Resource tax shelters like this one come to market from time to time. They have been around for decades and are sanctioned by government, so there is really no risk of a challenge from Revenue Canada like there would be in some other types of tax shelters.

The resource tax shelters take advantage of the special tax rules governing oil and gas and mining exploration expenses and renewable energy development costs.

Resource companies, particularly small ones that can’t take full advantage of the generous tax deductions associated with exploration, can flow these tax deductions through to investors via specially created flow-through shares.

The resource limited partnerships buy these flow-through shares with the funds raised from selling partnership units. The investors in the partnership units – generally individuals in high tax brackets – then use these deductions for themselves.

Anyone at the highest tax bracket investing $10,000 in the Canada Dominion Resources 2005 Limited Partnership will be able to claim almost the full $10,000 – $9,996 to be exact – as a deductible expense in 2005, according to the prospectus.

For high-bracket taxpayers in Ontario, the deduction would reduce income taxes by $5,078, meaning that the after-tax money at risk in the investment would be $4,922. (Comparable tax savings would be $5,257 in Quebec, $5,121 in New Brunswick, and $4,346 in Alberta.)

When the partnership units are dissolved in approximately two years, investors will have to pay capital gains taxes on anything received (since the deduction effectively lowers the adjusted cost base to zero), although this can be further postponed.

Part of the tax advantage is that investors don’t have to pay capital gains tax in the year the partnerships are dissolved. If they choose to roll the partnership units into a resource mutual fund, taxes would need to be paid only when the mutual fund units are sold later.

At dissolution or eventual sale, the proceeds received would only have to be $6,409 to breakeven on an after-tax basis – something that should be fairly easy for the managers to do since the full $10,000 is being invested mostly in fast-growing exploration companies that should continue to do well in a high-resource-price environment, although nothing is guaranteed.

Creststreet Capital Corporation, which has introduced the Creststreet 2005 Limited Partnership seeking $75 million from investors, has recorded good performance on its previous partnerships. After-tax returns to January 2005 on its first and second 2003 limited partnerships are 81 per cent and 55 per cent, respectively, and on its 2004 partnership the after-tax return is 25 per cent, says its prospectus.

Mavrix Fund Management, which is offering the Mavrix Resource Fund 2005-I Limited Partnership, says in its prospectus that it has achieved after-tax gains to the end of January 2005 of 42 per cent for its 2004 limited partnership.

Middlefield Capital’s resource partnerships produced after-tax gains of 53 per cent from July 2003 to January 2005, 21 per cent from November 2003 to January 2005, and 14 per cent from May 2004 to January 2005, according to its prospectus for the MRF 2005 Resource Limited Partnership seeking $100 million from investors.

Other similar offerings include the CMP 2005 Resource Limited Partnership, MSP 2005 Resource Limited Partnership, Qwest Energy Flow-Through Limited Partnership and Front Street Flow-Through 2005 Limited Partnership.

All emphasize investment in oil and gas and mining companies except First Asset Renewable Power Flow-Through Limited Partnership II, which will invest mainly in renewable electric power generation, such as wind and hydro. The prospectus says a $10,000 investment in its units would generate $8,700 in deductions in 2005.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2005 Wayne Cheveldayoff