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101 Tax Secrets for Canadians
101 Tax Secrets for Canadians

Book Excerpt

Bulls, bears and baseball: tax strategies for investors Add to ...

Speak to a financial advisor to find out more, or to buy flow-through shares.


• Flow-through shares are shares in resource companies that are undertaking exploration and development. These shares provide a tax deduction that is typically equal to the amount invested.

• Because of the tax deduction, there are many practical uses for flow-through shares in tax planning, including the ability to help charities at a low cost to you.

• These are higher-risk investments that should not form more than 5 to 10 per cent of your portfolio.

Tim's Tip 58: Utilize an equity monetization strategy to diversify without triggering tax.

Recently, The Wall Street Journal profiled Gillette Co.'s research lab and reported that the company is working on a new deodorant that blocks odour receptors in the noses of people around you. Evidently, you can't stink if no one can smell you.

According to lab director Dr. Ahmet Baydar, Gillette carries out its testing using a synthetic version of underarm odour called the "malodor compound," which can leave an entire office reeking for days. "Just three or four molecules is all it takes,"

Baydar says. Testing also involves placing five judges in a "hot room" to sniff the armpits of test subjects. Armpits are rated on a scale of 1 to 10, with 10 meaning "your head snaps back," according to one employee.

Dealing with body odour can be a real dilemma. But it's nothing technology can't fix. And if you're an investor, certain tax problems can be fixed with technology too.

Investment technology, that is. In fact, there's plenty you can accomplish with an equity monetization strategy.

The Strategy

Picture this. You're the proud owner of a stock that has appreciated in value and you've got too much tied up in this one security. That's right, you've got too many eggs in one basket. The problem? If you sell all or a portion of your holdings in the stock in order to diversify, you're going to trigger a tax liability large enough to wipe out the national debt, give or take. Not to worry. An equity monetization strategy can help.

Under this strategy, you can make use of a customized over-the-counter derivative contract-a forward sale contract-that will allow you to: (1) lock in any gains on paper that you have enjoyed, (2) defer tax on a sale of the stock by avoiding an actual disposition, (3) diversify your holdings through use of a loan, (4) create an interest deduction, and (5) avoid any margin calls that might otherwise apply when borrowing.

The forward contract will allow you to lock-in a selling price at a future pre-determined date. Basically, a financial institution (say, a bank) agrees to buy your stock from you at a set price on a future date. Typically, you'll be restricted to publicly traded securities. Once you've locked in a price, the bank will now lend you money based on the price you'll be collecting for your stock when the forward contract matures. Consider Frank's story.


Frank owns 25,000 shares of XYZ company, which trades at $40 today, for a total value of $1-million.

His bank is willing to enter a forward contract with Frank that will give him the right to sell his XYZ shares to that bank for $45 per share five years from now. That is, Frank is guaranteed to receive $1.125-million in five years for his XYZ shares.

In Frank's case, the bank has agreed to a cash settlement in five years when the forward contract matures. Suppose that XYZ stock trades at $40 in five years. In that case, the bank will pay Frank $5 per share, since it guaranteed him a price of $45 ($5 profit per share) for the stock, and Frank will keep the stock. If XYZ is trading at $48 in five years, Frank will have to pay the bank $3 per share because he was only guaranteed to receive a profit of $5 per share, and he'll keep his XYZ shares. Any profit over the forward price of $45 belongs to the bank. Finally, if XYZ trades at $45 per share in five years, no cash will change hands, and Frank will keep his stock.

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