Episode 33 - Critical Mineral Investment with GrahamDec 15, 2023
Dr. Wing Lim invites Graham, an expert in flow-through shares and VP of Business Development focused on flow-through since 2010, to the show to explain what flow-through is. Not only does Graham define flow-through shares, but he also explains their amazing tax benefits, potential risks, and who they work best for.
The flow-through program was developed by the Canadian government to help resource companies raise capital to explore for minerals to mine. The original program was developed with a main credit called the Canadian Exploration Expenses credit (CEE). Graham goes into detail about how the CEE differs from an RSP or TFSA and then explains the additional tax credits available to investors on top of the original CEE. He shares a partial list of the critical minerals that qualify, how flow-through shares work, potential tax deduction numbers, and the inherent risks worth considering. This is a fireside chat introduction to the opportunities of flow-through shares so we can all ask informed questions of our tax accountants and advisors.
Dr. Kevin Mailo: [00:00:01] Hi, I'm Dr. Kevin Mailo, one of the co-hosts of the Physician Empowerment podcast. At Physician Empowerment, we're dedicated to improving the lives of Canadian physicians personally, professionally, and financially. If you're loving what you're listening to, let us know! We always want to hear your feedback. Connect with us. If you want to go further, we've got outstanding programing both in person and online. So look us up. But regardless, we hope you really enjoy this episode.
Dr. Wing Lim: [00:00:35] Okay, so welcome everyone to another exciting episode of Physician Empowerment, a live webinar series, and we talk about highly relevant topics. We interview interesting people on interesting topics that will help our physicians and medical colleagues live better lives. So we're not just physicians, we're physicians and other health professionals like dentists. And so we're really excited to have you join us tonight. And this, of course, becomes an evergreen podcast. So you can go back on. So let me introduce tonight our guest. Our guest is Graham. And Graham has been in the space of flow-through shares since 2010. So he's a Canadian living in Kelowna. But he's now talking to us from Huatulco, Mexico. And so we want to cover this topic, I've done three shares actually since 2012, and full disclosure, I actually bought it from from this company. And I really trusted them to have really, really good track record. So Graham's role is the VP of Business Development of the excellent capital in one of their flagship flow-through shares. So tonight it's a fireside chat to warm everybody up. What is flow-through, right, the history. What is about and how does it impact us as medical professionals? So without further ado, Graham, thank you for joining us from Huatulco in the midst of your holiday.
Graham: [00:02:07] No problem. I'm really happy. I mean, quite frankly, Wing, I would always come on board when you ask. And I'm always thrilled to talk about this program because I've seen how it can help people save significantly on taxes in Canada, especially professionals. So I'm always happy to participate.
Dr. Wing Lim: [00:02:27] Right now. So why don't you first walk us through? Because a lot of people have heard of it or haven't heard of it, but the knowledge base is almost zero. So walk us through what is flow-through share and why does the government creates such huge incentive like 100% plus tax write off?
Graham: [00:02:45] I know, and, yeah, absolutely. When people get exposed to the flow-through, the government flow-through program in Canada for the first time, it's almost too good to be true scenario. But it is a, first off, it is a federal government program that's been around for a long, decades, quite frankly. And we'll talk about that and maybe why people haven't heard of it. But essentially the program was developed back in the 70s in its current form. So decades ago, because Canada, as we all know, is a resource rich country. We do rely heavily on our natural resources and always have in Canada. But the idea of companies going out to explore, what I call poke holes in the ground, to go out and poke holes looking for, you know, whether it's oil or gas or minerals of any kind, precious metals, gold, whatever the case may be, is risky business. These explorers, these Canadian wonderful explorers, go out there, typically on their own dime, looking for these resources and and hope they find them. Well, the truth is they sometimes don't and they're not successful. So it's risky. Exploration is risky business. So what the government, the federal government did back in the day was created a program to help these resource companies go out and explore, to raise capital, to raise money to do their business. So to help them raise capital from investors, which is typically where capital comes from for most things, they offered significant tax benefits for the investors to put their money up so that significantly reduces the risk involved, obviously, when you get tax benefits or tax refunds. So the original program was developed and still continues today with a main, a main credit, if you will, called the Canadian Exploration Expenses credit. CEE. So it's just simply, that credit is simply a 100% deduction from income for every dollar invested in the flow-through program. So for every dollar that you give to these companies that are out exploring and needing capital, you get 100% reduction of income. That part would be similar to an RRSP.
Dr. Wing Lim: [00:05:13] Right. So then okay. Very good. So thanks for the intro. It's like gold rush. Right? So the government is incentivizing people to do gold rush equivalent. And then so there's, like RSP, there's some advantage. So can you tell us it's like RSP but it's not like RSP. In the sense it's better than RSP.
Graham: [00:05:33] It is. It actually gives quite frankly far more deductions now than RSP does. A typical RSP platform, as we all know an RSP is simply an account, things have to go in it. The flow-through is an actual program. So really in Canada there's some different programs out there, but as far as federal government programs spanning the country, there's really three on the tax side. There's RSPs, which we pretty much all know about. There's the somewhat newer TFSA program, which doesn't save you taxes up front, but it builds tax free within the program. So it is a tax program. So we have RSPs, TFSAs, and flow-through. The main difference between RSPs and flow-through are that, well, number one RSPs can only be purchased by an individual, not a corporation. Correct. Whereas flow-through can be purchased by an individual, a corporation or a trust. There's also a maximum contribution limit every year on an RSP. Whereas with flow-through there is no upper limit. The only the would be on the investor's, you know, suitability for the program and their risk tolerance. But there is no mandated upper limit on the program. And then really the main significant differentiator is, as I mentioned a few minutes ago, the first credit with the flow-through program is 100% reduction of your income by the amount you invest.
Graham: [00:07:15] That's exactly the way RSPs work. But in the flow-through case, there's two more federal tax credits involved on top of that. And these are for everybody that invests in flow-through individually. And they are what's called the mineral exploration tax credit. And that's a 15% additional ITC or investment tax credit on top of the 100% you get with the exploration expenses. And as of last year, 2022, there's now a third tax credit involved with flow-through. The federal government announced in 2022 that they were adding in a 30% tax credit, ITC, investment tax credit, on the flow-through program for any part of a fund that is invested in critical minerals. So it's called the Critical Minerals Investment Tax Credit. So you have the original 100% reduction of income for every dollar invested, which is somewhat similar to an RSP. You have the additional federal 15% mineral tax credit. And now the potential for a 30% tax credit on anything in a fund, in a flow-through fund, that's considered critical minerals. And the government gave a list of critical minerals.
Dr. Wing Lim: [00:08:40] Can you give us, I just know the list is big. Give us some common ones. A common one, is it lithium or is it... What is it?
Graham: [00:08:46] Yeah. There's a number of them, and some of them will make a lot of sense. Mainly they're minerals that are critical to the electrification of the world, to elect batteries, electric vehicles etcetera. So that's really what the government is promoting right now because we have a lot of those minerals, or most of them in Canada, and we can explore for them and bring them out of the ground. Examples, lithium of course, magnesium, cobalt, copper, the rare earth elements, none of which I can pronounce the names of, those elements as well. And interestingly, uranium, as of last year, the government has considered or has actually called now, classified, uranium as green.
Dr. Wing Lim: [00:09:35] Wow.
Graham: [00:09:36] Yeah. Yeah. Very interesting.
Dr. Wing Lim: [00:09:37] When you think about it, it is very green.
Graham: [00:09:40] Yeah. It is. And, you know, obviously this isn't the place or time to get into the pros and cons and things like that. But yeah, what happened a year ago was in this decades-old program, the federal government actually pulled oil and gas out of the flow-through program. So we can't buy oil and gas flow-through shares or, you know, shares of oil and gas companies now. They took that out. But they added in this critical minerals 30% tax credit. In other words, they're really trying to build, to help explorers and developers in Canada, Canadian companies, to go out and find more critical minerals. So that's the difference between RFP and flow-through right now.
Dr. Wing Lim: [00:10:27] Now, can you educate us, Graham, that I've heard about tax credit and tax deduction. What's the difference?
Graham: [00:10:35] Yeah yeah just...
Dr. Wing Lim: [00:10:37] Briefly.
Graham: [00:10:38] Yeah I will, I'll try and be brief there. And I'm glad you picked up on that, because I did use the two different terminologies here. I've mentioned the three different credits available. And the first one that I said has been around forever, for decades is the CEE, and that stands for Canadian Exploration Expenses. That is the main, that part is again, it's federal, everybody gets it. It's a 100% reduction in income. So for every dollar you invest, you get your tax slip from a flow-through company, you know, in the spring for the year, for the past year. And it'll show that CEE, your accountant simply reduces your income by that amount. So you save taxes, you know, to be simple, to simplify, if you're in a 50% marginal tax rate, a high income earner, and you invest in a flow-through, 50% of the money you invest is going to come back to you immediately in a tax refund. That's the CEE. In addition then, that second and third credit are called investment tax credits. They operate slightly differently than that first one. They don't reduce income by the amount, they actually, you multiply the first case 15%. It's called the mineral tax credit exploration, it's 15 - one five - percent. So you multiply your investment times 15%. That number comes directly off remaining taxes that you owe. So it's very powerful. And then the third credit is an investment tax credit as well of 30%. So you multiply, or you know, effectively, the auditors do this. You don't do any of this. We just in the industry give you a tax slip. But the critical minerals at 30%, any part of a fund that's critical, gets multiplied by 30%. And that number comes directly again off taxes you still owe. So very powerful. So there's a little difference in how the two...
Dr. Wing Lim: [00:12:44] So can I just, just give some numbers? So and you can tell me if I'm right or wrong. Right? So if let's say doctor XYZ makes 100,000 this year, taxable income, and invest $10,000 in there. So just based on the first, the CEE, then the income taxable income becomes 90,000.
Graham: [00:13:04] Right off the top.
Dr. Wing Lim: [00:13:05] Yeah. So and if doctor XYZ owes the government $50,000 in tax right then hey 15% of that, whatever they invest in, comes right off the tax. So potentially 40, so if they do $10,000 investment, so what 45% of that? Which is 40...
Graham: [00:13:26] But the only thing to keep in mind is the 100% everybody gets, the 15%, you get either the 15% on part of a fund or the 30. They don't stack on top of each other.
Dr. Wing Lim: [00:13:40] Got it. Potentially, let's say we buy the critical mineral. Then 30% of 10,000, that's 3000.
Graham: [00:13:47] That's right.
Dr. Wing Lim: [00:13:47] 3000 comes off your 50,000. And you owe that year for tax.
Graham: [00:13:51] Yeah, the way it works out for most funds, the way it works out, and again there's multiple, there's many many, you know, there's a number of flow-through funds in Canada. I would say on average an investor is going to get somewhere between 120 to 125% in deductions for every dollar they invest. So if they invest $10,000, they're going to get the equivalent of about $12,500 in deductions.
Dr. Wing Lim: [00:14:23] That's absolutely amazing.
Graham: [00:14:25] It is. And what it's done, especially with this added, when the government in 2022 added in this extra critical minerals tax credit, what it means again, and this is for an average fund, it depends how much a fund has in critical minerals or not critical or things like that, so it's hard to give exact numbers here, and every individual it will be different as well with their tax rates, but again, on average it'll be 120, 125% in tax benefits for every dollar invested. And what that does is it reduces, when you calculate it out, it reduces the at risk money, that $10,000 that you've invested, it typically reduces that down to $3 or 4000 out of the $10,000. That's the money you actually now have at risk because you've received all the rest back in tax refunds.
Dr. Wing Lim: [00:15:13] So there's so much refund that you're only about 30% of this is really at risk capital.
Graham: [00:15:18] And that's directly why the government's doing it. Is to, and by the way, there's no exact number on the benefit to the government. But I've heard in the industry many times over the years that the federal government, the CRA, basically, recoups, recovers anywhere from 3 to $4 in basically income generated for the government for every dollar they give back in tax credits to investors. And the reason for that is because these companies that explore, many of them are very successful and eventually pay a lot of tax. So it's been a very beneficial program for decades for both investors and the government, quite frankly.
Dr. Wing Lim: [00:16:04] Right on. So I think we touched on this is such a good program. And the next question is, well, how comes my accountant didn't just jump at my throat on that?
Graham: [00:16:15] It's you know, I've mentioned it's been around for a long time. The actual original, the very, very origination of the program in an older form was mid 1950s. This program's been around since before the RSP program. It came into its current life in the early 70s. Why isn't it more well known? One of the main reasons it's not is, and I think this is from the accounting side of it perhaps, is there is risk, of course. And a lot of times, quite frankly, I think accountants don't want to, you know, be responsible for talking about a product that has risk. You know, it's very, very difficult sometimes, even though it's been de-risked so much. The other reason, and I think this is far more, will answer the question I think far better, is the big institutions in Canada, the big banks, the big financial institutions, the big investment sellers, they're not really interested in the flow-through program. And the reason that they're not is it's just for them, not big enough, quite frankly. On average, over the years, the Canadian Federal flow-through program has raised, on average, about a half a billion a year in capital. So about 500 million a year gets raised every year in flow-through. And I'm sure that's, you know, in a niche market that's a pretty good number. But to the Royal Bank of Canada, it's just not look. They look at that and go, no, we're not interested in that kind of niche small market. They're far more interested in doing mutual funds and RSPs, which are, you know, continuous. That's really why it's been mostly, up until about ten years ago, it's been mostly the purview of certain accountants and certain tax lawyers that paid attention to it. Now there's more and more funds. So it's getting a lot more attention. There's more people like yourself looking at it.
Dr. Wing Lim: [00:18:11] Yeah. So if you had 50% tax bracket, right, if you added 25% tax bracket, it doesn't make as much impact as 50 plus percent.
Graham: [00:18:19] Yeah. And we get, you know, people ask me oftentimes like what would, who should buy this? Who should invest? Who should invest in flow-through? And there's two answers. One, anybody that's got a tax problem. If people have a tax problem, they should look at flow-through. If their tax problem is five grand in a year, maybe not. They're, really in my mind to get the biggest bang for your buck out of this, you really should be in the, I'd say the 35 to 50% marginal tax rate, right?
Dr. Wing Lim: [00:18:58] The bigger the tax problem, the bigger the solution, right?
Graham: [00:19:01] That's exactly it.
Dr. Wing Lim: [00:19:03] Yeah. Right. So maybe tell us, okay, so this is the good side. Tell us the worst. What's the worst scenario that could happen?
Graham: [00:19:11] People can lose money. And and I'm not being flippant. It just, it can happen. This is, there is risk involved with this program. And you know, that's why it's imperative too that the individuals look at, know a few good questions to ask a flow-through fund. And we can talk about that if we have time. But yeah, the ups and downs of it. This is, for the most part, junior, what they would call junior resource companies in Canada, which are smaller companies, their share prices are smaller, their, I guess they would be what's termed as penny stocks out there, even though some of them have been around doing this for decades. They've been around a long time. There are still smaller companies. They go explore, they find something, they move on. Or quite frankly, they get bought out and they start it again. They get, when they find something, they get bought out by a bigger developer and they start exploring again. So they're back to being small. So that's where the real risk is, is when a fund is put together, quite frankly, if the fund manager, the research team involved, aren't that great at picking the stocks, these funds can go down dramatically. I've seen funds, they don't go to zero these funds because they have many different companies in them, many different shares, but have seen a, from certain companies out there, I've seen a $10,000 investment get paid back at $1,000, let's say. A few, you know, 18 months or 24 months later. Well, you need to get back about $4, quite frankly, 3 to $4 to break even. Unattend, I'm talking $10 purchase prices. You know, so you would need to get back 3 or $4. I've seen returns of a dollar, $1.50. So those are actual real losses.
Dr. Wing Lim: [00:21:07] And those is not right away. Right? It's over time. Right?
Graham: [00:21:11] Yeah. Most flow-through funds in Canada operate on anywhere from a 8 to a 24 month kind of window. There are a select few out there that have done a great job by being a little bit longer term for their investors, maybe 3 to 5 years. I've found that those companies have done a little bit better, quite frankly, because what they've done is they've given the resource companies more time. So hopefully make a profit. So there are a few companies like that out there.
Dr. Wing Lim: [00:21:47] But it's also dependent on cycles.
Graham: [00:21:50] It is. And when I mentioned that these are junior resource companies, a lot of them are, most of them, in fact, of this variety, are traded on the TSX Venture Exchange, out of Calgary, not the general TSX, but they're traded on the TSX Venture. And so you've got to look at that exchange to see how it's gone up and down over the years. And it doesn't track the same as the TSX. Okay. It is a totally different market. Now the TSX Venture isn't just resource companies. There's tech companies and all kinds of small firms there, but it seems to have its own path. And yeah, it went through a long bare market, quite frankly, the TSX Venture went through a bare or a down market from 2010 to about 2017. So it's kind of on a downward rate, but it also goes up. And right now, by the way, the market in general for this in Canada is somewhat, is low, like it's been here. So there's, you know, who knows. But it may be an opportune time to get into natural resources in Canada because they are somewhat suppressed right now.
Dr. Wing Lim: [00:23:07] Right. Tell us something about this super cycle.
Graham: [00:23:10] Well, that's kind of where that, you know, we're in that, there are a lot of us believe that we're kind of in the first or second inning of a super cycle right now, and all that means is a bull market or a potential up market on steroids. Meaning that it's going to go high and it'll last, this bull market in commodities, if it truly is a super cycle - and there's been three super cycles in history before, this would be the fourth - it would last for maybe as long as 6, 8, 10 years. The super cycle. A lot of the very experienced portfolio managers, the commodity people out there in Canada, the, you know, commodity trading managers and the guys like Sprott and, you know, they've been calling this now for 2 or 3 years. And they all feel that we're in the beginning of that super cycle. And really it's because there was such a depression for those years I talked about. Nothing got done. And it takes, once things get rolling again - and precious metals, for example, like gold, and I think we're all pretty familiar that, you know, gold is on a, you know, should be and has been on a bit of a trend - people are looking for ways to buy precious metals right now, but it takes, and now critical minerals like lithium and stuff and uranium, by the way, uranium has started to go up dramatically now. Lithium went up dramatically 2 or 3 years ago. So that's, now just keep in mind that these super cycles, if that's what we're in, and a lot of us think we are, they don't go up in a straight line. Nothing goes up in a straight line. So it'll be a bit of a bumpy road right now, I think. Some years we'll be down a little bit, some will be up. But the general trend, I believe, for the next 8 to 10 years is going to be an upswing. So I look at the flow-through program, which was developed by the government to help this type of a cycle, really, as a significantly de-risked way for investors to get involved in commodities. Right? They don't have, yeah, they don't have to pick their own. They can get, you can get involved in gold and silver and lithium and a whole basket of these in the flow-through program now for your portfolio.
Dr. Wing Lim: [00:25:36] Right. So I listen to a lot of podcasts. That's how I do my pastime. And we're truly in a global village situation. A war in Ukraine. Boom. It affects Canada. It affects the African food supply because the wheat basket, but also minerals and resources. Right? When Russia and Ukraine have big war and now we have Middle East war, and so it impacts and of course, like you say, we're electrifying everything. Right? Electric vehicles. A patient of mine just, he's in a developing business of different kind of battery that is going to make the regular battery that we see now obsolete. There's so much advanced, technological advance, but the limiting factor is still the resources. Man, you got to find those nickel, cadmium, lithiums of the world. Right?
Graham: [00:26:27] And you do. And not only do you need to find them, once they're found, once once a resource is found, it doesn't relate to a producing mine next week. These take, these can take a few years to develop once that mineral is found. You know, there's obviously a lot of hoops and mountains to jump over literally with regulation before this gets off the ground and that mine gets running to produce what it needs to produce. That's why when I talk about the potential, if we're in a super cycle, I mean, we're in a bull market, but, you know, potentially a super cycle, that's why these can go for years because it takes time to ramp up reproduction.
Dr. Wing Lim: [00:27:12] And then is it true that the world is now coming to us because we are the Canadian Shield, right? Other places they have, but there's political instability. They don't have infrastructure. Right? They're coming to us.
Graham: [00:27:27] Yeah. The world does come to us. I mean, you know, we hear sometimes reasons why certain places don't come to us or they wish we were doing things differently here and there, regulation-wise in Canada. But the fact of the matter is, you know, for years, and I think it's true, I've been, to me, I like to keep things really simple, kind of dumbed down for myself. The world needs these minerals more than ever. We have them. So they're going to come and we're a stable country to deal with. And quite frankly, our environmental record is pretty good too, compared to a lot of other countries.
Dr. Wing Lim: [00:28:06] Right. So because it's uncertain and we possibly could be going into a super cycle, so is it wise to do dollar averaging thing, buy some every year?
Graham: [00:28:16] Well, yeah.
Dr. Wing Lim: [00:28:16] Or just buy a big lump sum?
Graham: [00:28:19] No, I would actually recommend that people don't buy a big lump sum necessarily, whatever big means to an individual. Um, I would say no, you're far better off once you understand the program and the merits of it, to cycle this, to buy some every year. Because there is going, even with the best fund in Canada out there, there's going to be the odd down year. One of the things to look at with any fund, quite frankly, is what I call an asymmetric return. How many, if a company has had 20 funds or 30 funds over the years, how many have been positive? How many have been negative? And if there's significantly more that have been positive than negative, that's a great asymmetric return for clients.
Dr. Wing Lim: [00:29:08] Got it.
Graham: [00:29:09] Right? It means that company kind of knows what they're doing.
Dr. Wing Lim: [00:29:12] Good.
Graham: [00:29:15] I recommend cycling.
Dr. Wing Lim: [00:29:18] Good. So you're walking into the last question I'm going to ask is, the funds are not created the same, equal, right? So our program is not to flag a fund, but to empower our listeners to ask smarter questions to their advisors. So what are a few questions, maybe three questions, they should ask these funds? Like what are the key separating, what differentiating questions? One of which is probably the asymmetric return, right? They need to have good track record that.
Graham: [00:29:47] That would be one, that wouldn't be the first question, or place to look, but that's absolutely one. How is the company done? You know, asymmetric? Have they had good asymmetric returns? To me, number one with anything in life, especially in the investment world, is management. Absolutely look at management. Look at their experience, their background, their credentials, how long they've been doing flow-through funds in Canada, what their relationships are with the mining groups, with the big investors in the mining community. I would also ask what that company's thesis is, what their investment thesis is. Because that can be critical, especially in flow-through. When you look at something like real estate, for example, buying a building, well, the thesis is pretty standard. Buy it and rent it and make money and hopefully it goes up. The thesis can be a little more, slightly more complicated in flow-through, but I would ask what the portfolio managers' thesis is. And they should be able to send you a 2 or 3 or 4 page only report on how they put, what their thoughts are, and how they put together the fund. And the reason you want that is, in my experience, I've seen a lot of flow-through funds out there that have focused on one thing only. Tax refunds for investors. That's great. But if you lose money, why bother? You really want to look for a fund whose investment thesis is to number one, try and put together a resource fund that's going to make people a profit and it comes, and just happens to come with flow-through shares. But in companies, their thesis is just to get you, is number one, to try and make a profit for their investors and give the significant benefits that down period in Canada were suppressed for about, they were poorly managed and just disappeared during the bare market. So I would look for companies that have just been consistent for many years, coming out with a product every year and doing their job.
Dr. Wing Lim: [00:31:50] Okay, good.
Graham: [00:31:51] Those are a few of the things that that you should look at.
Dr. Wing Lim: [00:31:54] Right. Right on. Okay. So that's really good. So I want to thank Graham for his pile of wisdom. Pearls of wisdom. He's been in there the good days and bad days. Seen a few cycles.
Dr. Kevin Mailo: [00:32:07] Thank you so much for listening to the Physician Empowerment podcast. If you're ready to take those next steps in transforming your practice, finances, or personal well-being, then come and join us at PhysEmpowerment.ca - P H Y S Empowerment dot ca - to learn more about how we can help. If today's episode resonated with you, I'd really appreciate it if you would share our podcast with a colleague or friend and head over to Apple Podcasts to give us a five-star rating and review. If you've got feedback, questions or suggestions for future episode topics, we'd love to hear from you. If you want to join us and be interviewed and share some of your story, we'd absolutely love that as well. Please send me an email at [email protected]. Thank you again for listening. Bye.