FP Answers: Should I follow my broker’s advice and invest in conduit stocks?

Posted on by Duane Roberts

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

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By Julie Cazzin and Allan Norman

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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.

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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.

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If you die before cashing in or shortly after starting CPP, the contributed money will remain part of the plan's total capital pool.

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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.

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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 it 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.

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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”

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