I have recently retired and received  a sizable severance package. My broker has suggested – as a tax avoidance – to look at investing in flow through shares. As a need to know I receive a monthly pension that is very good so the severance money is not necessarily required to bolster my pension. What do you know or suggest re flow through shares??

Wayne

Hi Wayne,

Congratulations on the package! Its always a bonus to get a pile of cash on the way out.

After the RRSP, flow through shares are the last bastion of tax avoidance in Canada. They are part of the tax code and as long as the company issuing them is in compliance with the statutes  you will not have to fight a rear guard action with CCRA. The provisions of the tax code allow you to use allowable exploration and development expenses incurred by the issuing company as a deduction on your tax return. The allowable deductions flow through to the investor.

The way that a flow through share works is that the investor who buys them gets to write off the entire amount of the investment. If you buy $20,000 in flow through shares the entire amount is tax deductible which would result in a reduction of your taxes. Assuming that you would be in the highest marginal tax bracket because of the severance the reduced taxes would be in the neighborhood of $10,000.

The effect is that you now have $20,000 in flow through shares and a tax bill that has been reduced by 10,000. The taxes you would have paid have assisted you in buying the investment.

Another thing to keep in mind is that your adjusted cost basis for the shares is treated as being zero so when you sell them you will pay tax on the entire selling price. The advantage would come as you will be at a lower tax bracket in retirement.

Flow through shares are not without risk as they are generally issued by small exploration companies in oil and gas and in mining. The smaller the company the higher the risk. There are  syndicates that offer portfolios of flow through shares that spread the risk by acquiring shares in many exploration companies.

I would suggest that you get in touch with an accountant to make sure you take advantage of your ability to shelter as much of the package into your RRSP as possible then look to other avenues for tax relief. In closing you should make sure that you consider the flow through shares as an investment first not simply as a way to avoid tax. Would you buy the shares without the tax angle?

Happy Capitalism!

Hi Lou,

When selling land that has been gifted by a family member (not inherited), how is the basis for tax established?

A Man Without Land Is Nothing

I understand the determination of property vs business vs capital gain income, however my question is, will the all the proceeds be taxed since nothing was paid for the land?  Thanks and happy capitalism.

Steve

Hi Steve,

I was an avid movie fan in my youth and I loved the scene in ” Gone With The Wind” where Mr. O’Hara lectured Scarlett on the value of land.  Woody Allen included a scene  in ” Love and Death”  that expounded on how much land has meant to a poor peasant and the entire plot of the ” Apprenticeship of Duddy Kravitz” is about acquiring and developing land.

What all the cinematic references in the world never talk about is the cost of receiving and carrying land which includes the taxes due on the disposition of land. There are two life lessons that are worth committing to memory for all time.

The first is there are very few transactions that do not attract tax and when dealing with tax issues make sure to consult a tax expert to avoid problems down the road.

I asked my expert Art Good, Chartered Accountant, who I call  Art Great because he has solved so many tax problems for me, to comment on your question for this very reason.

Here’s what Art had to say.

Hi Lou:

In answer to your question about the taxation of land that was received by way of a gift from a family member (a non-arms length transaction) the transfer is always deemed to be at fair value.  Therefore, on the initial gift there will be tax if the fair value exceeds the adjusted cost base of the transferor.  The adjusted cost base for the recipient (transferee) is the fair value to which would be added any new costs for land improvements.

Any subsequent sale by the recipient will be taxable if the selling price exceeds his adjusted cost base.

I would note that the person asking the question was not clear as to whether this was a transaction between spouses.  If the transfer (gift) is from one spouse to another it goes at the adjusted cost base of the transferor unless both parties elect to have the value at some higher value.  The election can pick any value above the adjusted cost base up to the fair value but not in
excess of that amount.

The basis of determining the value for tax purposes in these types of transactions is generally resolved by looking at similar property
transactions between arms length parties, appraisals, etc.

Trust this answers the question.

Art

The best advice I can give you Steve is  to seek advice from experts. Recruit an accountant, a lawyer, and a financial advisor to form a team of professionals to assist you.  I have always found that when I have to deal with an issue for the first time its a bit of a mystery but for Joe or Josephine the Pro its old hat.

Enjoy the gift whatever you decide to do with it and Happy Capitalism!

What are your thoughts on TFSA that was introduced in the beginning of ’09?

Is there any strings attach?  Kind of sounds to good to be true.  Any help will be appreciated.

Hi Nelson,

I know its hard to believe but the Tax Free Savings Accounts that came into being in January are not too good to be true they are too good to be missed!

Any resident of Canada 18 years of age or older can sock $5,000 a year into this shelter and get tax free growth on their assets regardless if the growth comes from capital gains, interest, or dividends. If you are interested in other types of investments such as options and futures you would best be served asking your accountant for clarification as to eligibility.

The link below will give you most of the information you need directly from the Canada Revenue Agency.

http://www.budget.gc.ca/2008/pamphlet-depliant/pamphlet-depliant2-eng.asp

Make the most of this opportunity to grow wealth tax free.

Happy Capitalism!