A New Strategy with 40%–90% ROI in Year 1 – 01 The Beginning

Author: James L

This is the first series contributed by our fans, after we gave the shout-out to our community to submit niche passive income strategies – I hope you find this one insightful as usual!😁 The author of this series is James L.

This is the first series contributed by our fans, after we gave the shout-out to our community to submit niche passive income strategies – I hope you find this one insightful as usual!

In the past couple of years, many people—especially those with higher incomes—have been uncomfortable seeing their pay stubs. Personally, when I see a pre-tax income of $13,000/month and only $6,000 in hand, it feels like my head just spins. Taxes and various fees are heavy, and to make matters worse, a lot of the money doesn’t even go to the local government. As a Canadian with a decent income, most of which comes from salary, is RRSP really the only tax-saving option? Some might say borrowing to invest—like using a HELOC—but that’s another topic, not niche enough for this audience. Plus, the reason leveraging has worked as a successful investment strategy is because of long bull markets. Naturally, when stocks are booming, leverage isn’t scary. I’ve made big gains using credit card leverage myself. But in today’s market, the cost-effectiveness of that method has definitely dropped.

Whenever I attend investment-related conferences or casual meetups, I often chat with older folks—many retired, or those still working in high-level roles at an advanced age. They tend to have a lot of valuable insights, especially those involved in finance and insurance. Once, quite by chance, I learned about the following tax-saving method. I say “tax-saving” rather than “tax avoidance” because this approach is entirely legal, government-approved, and even encouraged.

It’s called Flow-Through Shares (FTS). Tracing its origins, this method was legislated by the government as early as the 1950s, even before RRSPs were introduced. It only really gained popularity starting in the 1990s. When I asked why such an old method is still relatively unknown, the answer was simple: it has a high entry barrier. You must be an accredited investor to participate, which means you need to meet criteria like an annual income over $200,000 for two consecutive years, or a household income over $300,000, or net assets over $1 million, and so on. Over 90% of people don’t qualify, so naturally, few know about it. But what exactly is a flow-through share?

As everyone knows, Canada is a vast country rich in natural resources. The government encourages companies to explore mines by offering generous tax credits. The problem is, these companies are only spending money during exploration, so they have no income to offset with deductions—meaning the tax credits are effectively useless to them. So, the government came up with a clever solution: companies can sell their shares to individual investors and transfer the tax credits to them. Flow-through shares are essentially the transfer of these tax deduction benefits. These credits can be deducted 100% against personal income.

For example, if you live in Ontario and earn $500,000 personally—which is quite wealthy—the top tax bracket is 52%. If you buy $100,000 worth of flow-through shares in a mining company that year, when you file taxes, the government will refund you $52,000. On top of that, the federal government offers a 15% investment tax credit (ITC). If the company mines one of 16 special minerals (like lithium, uranium, etc.), you get an additional 15%. That adds up to $30,000. Ontario also offers a 5% provincial investment tax credit, adding another $5,000. So, come tax season, you could get back $52,000 + $30,000 + $5,000 = $87,000—while still holding $100,000 worth of the mining company’s stock.

At this point, some sharp readers may already be wondering about an obvious risk with this model—but this post is already quite long, so I’ll save that for the next post which will reveal a new model to execute flow-through shares. Now, why is this tax-saving method so favored by the government? Most mining operations are outside major metropolitan areas, often near Indigenous communities. These projects create local jobs, hire locals, pay decent wages, and stimulate regional economies. Which politician wouldn’t love that? Moreover, as the world becomes more divided, Canada is an important mineral supplier to its allies. From every angle, the government wants to support and encourage mining exploration. In recent decades, other than donation-related tax credits which require receipts, CRA audits on flow-through shares are almost nonexistent. The vast majority of people using this method are high-income professionals like doctors, lawyers, and accountants. Why are these high earners so eager to use flow-through shares for tax saving? That will be revealed next time.