Understanding CEE and CDE Flow-Through LPs

Transcription

1 Uderstadig CEE ad CDE Flow-Through LPs Flow-through Limited Partership ivestmets provide Caadias ad Caadia resource compaies the opportuity to ivest together i our vital atural resource sector ad also receive attractive tax deductios I the early 1980s, the Caadia govermet established a icetive for Caadias to ivest i compaies i the atural resource sector. These compaies were permitted to flow through their Caadia Exploratio Expeses ad Caadia Developmet Expeses to ivestors so that ivestors ca deduct these expeses agaist their taxable icome. The cotets of this documet are iteded for iformatio purposes oly ad should be ot be cosidered as a advertisemet or offer to sell, or solicitatio to buy, ay securities i ay jurisdictio. Every effort has bee made to esure that the iformatio cotaied herei is accurate, complete ad up to date. However, o guaratee, either expressed or implied, is made that the iformatio i this presetatio is accurate, complete or up to date. The cotets of this documet are for iformatioal purposes oly ad are ot iteded to provide fiacial, legal, accoutig or tax advice ad should ot be relied upo i that regard. The views give i this documet are the views of Qwest Ivestmet Maagemet Corp. ad are based o publicly available iformatio. Please cotact your ivestmet advisor or tax advisor to discuss your flow through questios.

2 Executive summary Flow through shares are commo shares issued by resource compaies. Flow through shares allow resource compaies to flow through Caadia Exploratio Expeses (CEE) ad Caadia Developmet Expeses (CDE) to flow through share ivestors. Resource issuers offerig CEE flow through shares typically demad a higher premium price tha CDE flow through shares. CEE flow through shares are typically issued by smaller resource issuers (e.g. juior oil ad gas compaies ) ad CDE flow through shares typically issued by larger juior ad smaller mide size compaies. CEE flow through shares offer 100% tax deductio ad CDE flowthrough shares offer a 100% tax deductio calculated o a aual 30% decliig balace basis. There are umerous tax plaig opportuities for idividual ivestors ad corporate ivestors who choose to purchase flow through shares. Ivestors ca ivest directly i flow through shares issued by resource compaies. This is ofte challegig, if ot available, to ivestors as istitutioal ivestor typically get all of the flow through shares issued. Ivestors ca participate i flow through limited partership offerigs which are maaged by portfolio maagers ad as a istitutioal ivestor typically access all flow through share issuaces. Flow through limited parterships typically provide liquidity by rollig, o a tax deferred basis, to a mutual fud twelve to thirty six moths from partership s closig date. Ivestors receive flow through tax related iformatio from their ivestmet dealer or from the geeral parter of a limited partership if ivestmet is direct with the geeral parter. QWEST INVESTMENT MANAGEMENT CORP. /2

3 What are flow-through shares? Through job creatio ad tax reveue all Caadias beefit from ivestmet i the exploratio ad developmet of our atural resources Flow through shares are commo shares issued by resource compaies which provide flow through tax deductios to their flow through share ivestors. Resource compaies issue flow through shares to attract capital to fud their exploratio ad developmet activities i Caada ad the "flow through" their eligible Caadia Exploratio Expeses (CEE) ad Caadia Developmet Expeses (CDE) to their flow through share ivestors. Flow through ivestors, both idividuals ad compaies, ca deduct CEE ad CDE expeses received from their flow through ivestmet agaist their taxable icome. Why does the Govermet of Caada provide ivestors with a flow through tax deductio? The Govermet of Caada recogizes the ecoomic beefits of the exploratio ad developmet of Caada s atural resources ad ecourages ivestmet by allowig CEE ad CDE expeses to be deducted by flowthrough share ivestors. Origially, CEE ad CDE were oly deductible agaist resource icome geerated by resource compaies. However, i 1983 the federal govermet chaged legislatio which allowed qualifyig CEE ad CDE expeses to flow through to ivestors of flow through shares. I recet years, the federal govermet ad some provices have also itroduced additioal tax icetives for ivestors purchasig certai flow through shares issued by Caadia miig compaies to provide additioal icetive for ivestmet i Caada s miig sector. What are the tax beefits? Both a CEE ad a CDE flow through limited partership offer a 100% tax deductio. The differece is that CEE is deductible 100% i the year of the flow through ivestmet ad the CDE deductio is calculated o a 30% decliig balace basis startig the year of the flow through ivestmet. QWEST INVESTMENT MANAGEMENT CORP. /3

4 How does a typical flow-through LP work? Both idividuals ad compaies may ivest i a flow through limited partership ( LP ). The LP s portfolio maager will diversify ivestmets i flow through shares issued by resource compaies. Resource compaies use the LP s capital to icur eligible CEE ad/or CDE expeses. Resource compaies the flow through the CEE ad CDE expeses to the LP that ivested i their flow through shares. The LP the flows the eligible CEE ad/or CDE expeses to its limited parters by issuig a tax slip to ivestors. LP ivestors the use a T5013 ad a T1229 to claim their flow through tax deductio agaist their taxable icome. The LP typically provides liquidity through a tax deferred rollover of the LP s assets to a mutual fud ad ivestors ca choose to either hold or sell their mutual fud shares. Typical Flow Through LP Ivestmet Structure QWEST INVESTMENT MANAGEMENT CORP. /4

5 Importat differeces betwee CEE ad CDE flow-through opportuities The differece betwee a flow through LP offerig a CEE flow through opportuity ad a CDE flow through opportuity comes dow to the profile ad activity of the atural resource compay issuig flow through shares. The followig focuses o oil ad gas compaies oly. Flow-through LPs may provide ivestors with a solutio that meets their ivestmet ad tax plaig eeds Oil ad Gas Issuig CEE Issuig CDE Compay Profile Flow through Shares Flow through Shares Typical oil ad gas compay activity: Typical size of oil ad gas compay: Typical stage of oil ad gas compay: Exploratio activity creates CEE ad is a higher risk but geerally is a higher reward activity Mostly early stage compaies through to larger juior compaies Start up ad earlier stage compaies focused o rapid growth Developmet activity creates CDE ad is a lower risk but geerally is a lower reward activity Larger juior compaies through to mid size compaies More established compaies focused o steady growth Typical risk profile of oil & gas compay: Typical rage of idustry premiums: Ivestor tax deductio: Higher risk Rage: 10% 30% Compaies commad a higher share price premium for their flowthrough shares because of the tax deductio value ad high demad for CEE flow through shares 100% tax deductio i year of ivestmet (reflects higher risk profile) Lower risk Rage: 0% 15% Compaies offer CDE flowthrough shares at a lower share price premium because of lower tax deductio value ad lower demad for CDE flowthrough shares 100% tax deductio calculated o a 30% decliig balace basis startig the year of ivestmet (reflects lower risk profile) QWEST INVESTMENT MANAGEMENT CORP. /5

6 Beefits to ivestig i flow-through LPs The followig are examples of beefits that are available to ivestors who ivest i flow through limited parterships. Summary of beefits 1 Potetial Ivestmet Capital Appreciatio from flow through LPs diversified ivestmets i oil ad gas growth compaies. 2 Reduce Tax ad Margial Tax Rate by usig flow through LP s tax deductio. Flow-Through LPs ca be a importat tool i wealth maagemet ad tax plaig 3 Defer Triggerig Capital Gai Tax by holdig o to the flow through LP assets that have rolled to a mutual fud util at a lower margial tax rate. 4 Use Flow Through LP Capital Gais agaist capital losses to reduce capital gai tax payable. 5 Make a Charitable Doatio by doatig the flow through rollover assets (e.g. mutual fud shares) to qualified charitable orgaizatios. 6 Corporatios ad Persoal Holdig Compaies ca use flow through LP tax deductios ad also use the compay s capital losses to offset flow through capital gais. Qwest is pleased to provide more iformatio o the various beefits ad strategies that ca be cosidered with flow through LP ivestig at QWEST INVESTMENT MANAGEMENT CORP. /6

7 Limited Parterships may offer a CEE fud ad/or a CDE fud Limited Parterships allow ivestors the opportuity to tailor a ivestmet, tax plaig ad risk tolerace solutios that meets their eeds. Ivestors may choose to ivest 100% of their flow through ivestmet ito either a LP with a CEE fud; a LP with a CDE fud; or a percetage betwee a LP with CEE fud ad a LP with a CDE fud. Characteristics of LP CEE & CDE fuds Characteristics CEE Fud CDE Fud Typical compay size: Tax deductio: Smaller juior oil ad gas compaies 100% i year of ivestmet Larger juior to smaller midsize oil ad gas compaies 100% calculated o a 30% decliig balace basis startig year of ivestmet Flow through LP duratio: Liquidity evet i year after ivestmet Liquidity evet i year after ivestmet Typical premium rage: 10% to 20% 5% to 15% Risk profile: Higher risk Lower risk A LP with a CEE fud or a CDE fud provides a lower break eve price poit after takig ito accout the flow through tax savigs ad the et after tax ivestmet cost. Highest margial tax rate by provice: based o a $10,000 CEE ivestmet example Provice BC AB SK MB ON NB NS PEI NFLD Highest margial tax rate: 47.70% 48.00% 48.00% 50.40% 53.53% 53.30% 54.00% 51.37% 48.30% Flow-through ivestmet: $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 Less flow-through tax savigs: -$4,770 -$4,800 -$4,800 -$5,040 -$5,353 -$5,353 -$5,400 -$5,137 -$4,830 Ivestmet at risk: $5,230 $5,200 $5,200 $4,960 $4,647 $4,647 $4,600 $4,863 $5,170 QWEST INVESTMENT MANAGEMENT CORP. /7

8 Tax deductios for CEE fuds ad CDE fuds Ivestors ca choose a LP with a CEE fud for a 100% tax deductio i the year of ivestmet or may choose a LP with a CDE fud for a 100% tax deductio calculated o a 30% decliig balace basis startig i the year of ivestmet, as illustrated. Tax Deductio Table for CEE Fuds: Based o a $10,000 ivestmet 100% tax deductio Tax Savigs Year 1 tax savigs: $10,000 x 100 x 45%* = $4,500 * Assumes 45% margial tax rate ad full ivestmet deductio Note: please refer to the previous page for the 2016 highest margial tax rates by provice. Ivestors who purchase a CDE fud o a aual basis will realize icreasig cumulative percetage tax deductios (illustrates first 5 years oly): Year 1: 30% Year 2: 51% Year 3: 66% Year 4: 76% Year 5: 83% Tax Deductio Table for CDE Fuds: Based o a $10,000 ivestmet 30% decliig balace basis tax deductio Tax Savigs Cumulative Tax Savigs Year 1 tax savigs: $10,000 x 30% = $3,000 x 45%* = $1, $1, Year 2 tax savigs: $7,000 x 30% = $2,100 x 45%* = $ $2, Year 3 tax savigs: $4,900 x 30% = $1,470 x 45%* = $ $2, Year 4 tax savigs: $3,430 x 30% = $1,029 x 45%* = $ $3, Year 5 tax savigs: $2,401 x 30% = $ x 45%* = $ $3,743.69** * Assumes 45% margial tax rate ** This table oly shows the first 5 years of tax savigs. Tax deductios cotiue util 100% of the ivestmet is fully deducted. Note: please refer to the previous page for the 2016 highest margial tax rates by provice. QWEST INVESTMENT MANAGEMENT CORP. /8

9 LP flow-through taxatio cycle Year of flow through ivestmet Ivestor purchases uits i a flow through LP. Ivestor receives a T5013A Statemet of Partership Icome tax slip from their brokerage firm i the followig year, typically i March, that assigs the amout of their CEE ad/or CDE tax deductios. Ay capital gai realized i the flow through LP portfolio durig this year will icrease the ivestmet s Adjusted Cost Base ( ACB ). Ivestors will receive a T5013A tax slip the followig year which idicates the amout of this capital gai created by portfolio activity. Rollover year The flow through LP rolls its assets, o a tax deferred basis, to a mutual fud ad ivestors receive shares i the mutual fud. Ivestors may hold o to the mutual fud shares. Ivestors may redeem their mutual fud shares for cash, which triggers a tax evet. The amout of capital gai or capital loss tax will deped o the value of the redemptio proceeds mius the ACB. Ay capital gai realized i the flow through LP portfolio durig this year will icrease the ACB. Ivestors will receive a fial T5013A tax slip the followig year which idicates the amout of this capital gai ad ay additioal tax deductios. Subsequet years 1 Ivestors may cotiue to deduct ay uclaimed CEE ad CDE flowthrough tax deductios agaist their taxable icome. QWEST INVESTMENT MANAGEMENT CORP. /9 /9

10 Completig your tax retur to claim flow-through tax deductios The followig is a example of where to isert CEE ad CDE flow through iformatio o tax retur forms. T1 Geeral CEE ad CDE claimed to reduce your taxable icome. Calculatio completed o a T1229 form. T1229 CEE ad CDE deductios received are provided i a T5013A tax slip from ivestor s brokerage firm Start with the uused balace from prior year Add ay ew CEE or CDE received for the taxatio year The available balace i each pool The maximum allowable deductio for the taxable year 100% of CEE pool 30% of CDE pool Amout claimed for taxatio year Edig balace i the pool for deductio i future years QWEST INVESTMENT MANAGEMENT CORP. /10 QWEST INVESTMENT MANAGEMENT CORP.

11 Qwest s oil & gas portfolio maagemet team Qwest Ivestmet Fud Maagemet Ltd. Our Three Q s: The followig are our critical criteria for selectig oil & gas compaies for flow-through share ivestmets: Quality maagemet team Quality oil & gas assets Quality balace sheet Qwest s Calgary based oil ad gas portfolio maagemet team has sigificat oil ad gas idustry kowledge ad experiece. Our team takes a disciplied ad aalytical approach to selectig oil ad gas ivestmets. Our team performs a thorough due diligece process ad ivests i compaies with a combiatio of soud fiacial fudametals, excellet growth prospects ad a strog maagemet team. Do Short, CFA Mr. Do Short is the Seior Vice Presidet ad Portfolio Maager ad a Director of Qwest Ivestmet Fud Maagemet Ltd. ("QIFM"), a registered ivestmet fud maager ad portfolio maager. QIFM is also a exempt market dealer i British Columbia, Alberta ad Otario. As portfolio maager, Do is resposible for leadig his Calgary based portfolio maagemet team i the research, aalysis ad selectio of oil ad gas ivestmet opportuities for our various atural resource sector fuds. Bor ad raised i Calgary, Alberta, Do has focused his professioal ivestmet career o Calgary's oil ad gas idustry sice the early 1990's with various positios at compaies icludig: Raymod James Ltd., FirstEergy, ad Northridge Caada Ic. QWEST INVESTMENT MANAGEMENT CORP. /11 QWEST INVESTMENT MANAGEMENT CORP.

12 Cotact Us For more iformatio about Qwest Ivestmet Maagemet Corp., our flow through products ad flow through iformatio, please cotact us (ext. #1) or at ifo@qwestfuds.com. The cotets of this documet are iteded for iformatio purposes oly ad should be ot be cosidered as a advertisemet or offer to sell, or solicitatio to buy, ay securities i ay jurisdictio. Every effort has bee made to esure that the iformatio cotaied herei is accurate, complete ad up to date. However, o guaratee, either expressed or implied, is made that the iformatio i this presetatio is accurate, complete or up to date. The cotets of this documet are for iformatioal purposes oly ad are ot iteded to provide fiacial, legal, accoutig or tax advice ad should ot be relied upo i that regard. The views give i this documet are the views of Qwest Ivestmet Maagemet Corp. ad are based o publicly available iformatio. Please cotact your ivestmet advisor or tax advisor to discuss your flow through questios. QWEST INVESTMENT MANAGEMENT CORP. /12