November 11, 2008

There was a private placement, a maximum of 25,000,000 “flow-through” common shares at a price per share of $0.80, for gross proceeds of up to $20 million.

Who bought we don't know. It was private. Let's say Joe Hamilton bought some of these flow through shares.

As a round number lets use 50,000 shares.

What are the tax advantages?

• If you were to invest $50,000 in flow through shares, providing that they are eligible for the tax breaks, you can claim the full $50,000 on your tax return. If you are in the 40% tax bracket, that would equate to a $20,000 tax return for that year.

How does it work?

• As stated above, you get to claim the FULL amount invested against your income. However, when you sell, your adjusted cost base (ACB) is set to $0, ie. whatever you sell for is your PROFIT.
• If you were to invest $50,000, and sell 2 years later for $50,000, your profit would be considered $50,000. So to calculate your capital gains, with a 40% tax rate, would be $25000 x 40% = $10000 tax payable. Even in the scenario where the shares don’t change in price, you will receive a $10000 gain ($20000 tax return – $10000 tax payable

Okay now how about this senerio.

I invest 50,000 and buy flow through shares at 80 cents. I have 62,500 shares. I sell shares at $2.50. My investment is worth 2.5x 62,500 = $156,250

Tax is as follows

156,250 divide by 2 = 78,125.00 (capital gains on 50%

78,125.00x.40=31,250.00 tax

But I got a break of $20,000 for buying the flow through shares so I end up really paying 31,250-20,000 = $11,250 in tax.

Now I can buy more flow through at $2.80 and repeat the above. I'd take my $156,250 less the net tax of $11,250 and have $145,000.

I would take my $145,000 and assuming I'm still in the 40% tax bracket I'd get back 58,000 bucks and the rest of the process repeats. Great deal. Wish I qualified for the flow through shares. I would also be selling my 80 cent flow through's and buying the $2.80 flow throughs.