When one invests in flow-through shares of junior companies, they may become illiquid, and thus difficult to sell. One important option that few know about is to transfer them into you TFSA. This can be done at a low closing price to maximize the room in the TFSA. Occasionally you may get a non taxable home run that may be worth it.
As a side not, the big banks are promoting the TFSA for interest and dividend income – THIS IS JUST PLAIN WRONG. This is in the banks best interest, not yours. The best use of a TFSA for an individual investor, in my opinion, is for your riskiest and most volatile stocks. Sure, you will not get to carry back capital losses, but in the case of the occasional 10 bagger there will be no taxes.
Volatile and illiquid stocks can be moved into your TFSA and take advantage of temporary price swings to manage your TFSA into a viable tax haven. This is particularly interesting because one could theoretically transition a significant part of a taxable portfolio into a non-taxable TFSA using SWAPs. Think about this, move the volatile stock in when the price is low, when the price pops for some reason, SWAP the stock out and move cash in. Presto, you have increased the room in your TFSA! Wait for the stock to drop in price and SWAP even more of it back in. This may seem almost impossible to do and difficult to time, but with the lack of liquidity in today’s junior market, a stock can double on almost no volume – or drop by half. People with a portolio of flow-through shares or other junior stock they can’t sell due to lack of liquidity are in the perfect position to take advantage of the TFSA SWAP.
Remember, the purpose of the TFSA SWAP is to increase the room in your TFSA as fast as possible to theoretically transition your entire portfolio into it. This will cost you as most brokers charge a fee for a SWAP, in the range of $100, but to be tax free forever in your portfolio can be priceless.
The BC Ministry of Finance has released a bulletin to help explain the British Columbia mining flow‐through share (BC MFTS) tax credit available for individuals who invest in flow‐through shares offered by a corporation conducting mining exploration in BC.
A flow‐through share is a share, or the right to buy a share, of the stock of a mineral resource company. A flow‐through share is issued under a written agreement between a corporation and an individual. Under the agreement, the individual agrees to pay for the shares, and the corporation agrees to transfer certain mining expenditures to the individual.
If you are an individual who invests in flow‐through shares, offered by a corporation conducting mining exploration in British Columbia, you may qualify to claim a non‐refundable British Columbia income tax credit equal to 20% of the BC flow‐through mining expenditures that are transferred to you in a given year.
The expiry date for the BC MFTS tax credit is December 31, 2009.
For more information: May 2009 BC FT Share Bulletin
How do flow-through shares work? In a nutshell, exploration companies who issue flow-through shares renounce the tax losses since they are in the stage where they spend money on exploration and are not producing. These tax losses are passed on to the investor. The company must spend the flow-through dollars on exploration in Canada which includes most types of exploration such as soil sampling, geophysics and drilling. This money is not “hard dollars” and cannot be spent on overhead such as office expenses. However, the exloration company can get flow-through dollars at a premium to their stock price because investors will pay more to get the tax savings.
The majority of flow-through shares are available towards the end of each year to meet a demand from investors since they are more sure about their tax situation at this time. Investors can invest in flow-through shares through mutual fund type entities or by private placements from a specific company. There are advantages and disadvantages to both.