Canadian Family Offices senior editor Ashley Redmond sits down with Matthew Fireman, head of sales and distribution at PearTree Canada, to discuss how structured flow-through shares can help individuals and families reduce the after-tax cost of their charitable donations while supporting their broader wealth management goals.
Drawing on PearTree’s nearly two decades of experience, Fireman explains how the strategy works, including an example in which a $100,000 charitable donation can cost an Ontario donor less than $10,000 after tax under certain conditions.
In his conversation with Redmond, Fireman discusses:
- How structured flow-through shares can complement a family office’s existing tax and philanthropic strategies.
- How PearTree’s approach can significantly reduce the after-tax cost of charitable giving.
- Why flow-through shares are less complicated than many investors assume.
- How the use of an institutional end buyer can mitigate equity price risk.
- How alternative minimum tax rules and potential changes to the flow-through share regime could affect investors.
Transcript
Redmond: Hello, and thank you for joining today. My name is Ashley Redmond. I’m the senior editor at Canadian Family Offices. Today, I’m joined by Matthew Fireman from PearTree Canada. He is the head of sales and distribution. Matthew, thank you so much for joining me today.
Fireman: Thank you for having me today, Ashley.
Redmond: As you know, many family offices are looking for ways to improve tax strategy. So how do they fit flow-through shares into their plans while meeting their broader philanthropic goals?
Fireman: We like to look at our approach as another tool in the toolkit, quite frankly. We are there for one reason and one reason only, which is to help our clients execute on their charitable donation strategies as well as their tax efficiency strategies. So we’re really an enabler. So we work quite closely with a number of tax advisors and family offices who are structuring a very comprehensive approach for their clients and are looking at a way to add some extra value to that. Because it’s very difficult in the current climate, in the current economy, if you will, there’s very little tax play. There’s not a lot of room for people to become more efficient with their taxes. And so what we do is we bring that extra tool to the toolkit for people to use.
Redmond: Matthew, can you walk us through a practical example?
Fireman: Absolutely. So if we start with the premise that an individual would like to make a $100,000 donation, meaning their charity will receive net $100,000. Without using charity flow-through or structured flow-through with PearTree, that individual would write a check or put it on their credit card, get a charitable receipt for $100,000, reducing their taxable income. And assuming that they are in the highest marginal tax bracket, as all of our clients are, the actual after-tax cost of donation is about $50,000 or 50 cents on the dollar. Using the PearTree approach, we drive that cost of giving down to 9.95% in Ontario and even less in other provinces in the country. And how does that work? It’s because you buy a certain number of flow-through shares. You actually have to buy a multiple of your donation. So your $100,000 donation actually requires the individual to buy more than that in terms of flow-through shares. And then that total amount of flow-through shares off of that number, they calculate their what’s known as CEE, Canadian exploration expenses. You get deductions on that, investment tax credit, and then those are the two key flow-through share deductions and credits. Then you get a charitable receipt, then in flow-through shares, you have to pay a capital gain tax on the sale of the flow-through shares. And at the end of the transaction, though, that cost of giving has come down to 9.95%. Therefore, an individual who has the ability to purchase that large amount of flow-through shares up front and wait until they do their income tax in order to recoup all of the tax savings, it’s a phenomenal tool because they’re saving themselves about $40,000 on their donation. And what we have seen is this actually encourages people to donate more. We rarely see somebody who says, “Oh, wait, I can donate for a lower cost,” and not look for ways to actually maximize that donation. And so we see that a lot. So it’s a tremendous driver for the philanthropic community.
Redmond: One common misconception is that flow-through shares are complicated. What do you say to that?
Fireman: They’re not complicated. I think they’re misunderstood. Again, the nature of a flow-through share was designed to help support mining exploration companies. And again, as I said earlier, they’re inherently risky. So a lot of people shy away when they hear the word flow-through share because they’re not prepared to take on the risk that comes with holding stock in a company who is literally digging a hole in the ground hoping to find something. In our approach, we ensure that there is an institutional end buyer at the end of our transaction. So none of our donors, nor charity recipients hold the common shares after our transaction. So we completely eliminate any equity price risk. There’s no volatility risk in our transaction. So when somebody says it’s complicated, it’s not that it’s complicated, it’s that it’s misunderstood, and people don’t really understand, one, how the PearTree approach can work for them, or two, just in general, some of the risks involved, which is why everybody must be an accredited investor.
Redmond: Canada’s tax and policy landscape continues to evolve. What are you keeping an eye on that could potentially impact flow-through share investors?
Fireman: One of the suggestions during the last federal election campaign was perhaps expanding the flow-through share regime to other sectors of the economy, in particular, we’ll call it artificial intelligence, the technology space. We haven’t seen that yet, but that would be a phenomenal application, if you will, of the flow-through share regime because it’s really not much different than a company who is digging for gold, drilling for gold. It’s really R&D in both instances. And the other big thing that we’re looking at is alternative minimum tax, and of course, it’s the AMT rules that in our model, it’s what limits the amount of, or the size of the donation that somebody can make at the 9.95% cost of giving in Ontario. So these are the main things. So it’s the alternative minimum tax and expansion of the flow-through share regime.
Redmond: What is a key takeaway you would like Canadian family offices to remember about flow-through shares?
Fireman: What we do, which is structured flow-through shares, is a phenomenal tool. Again, it’s a tool in the toolkit. Doesn’t replace overall strategies. I look at it as there’s a long-term objective for the client to hit in terms of their wealth management goals and their tax efficiency, and you’re going to have to have different tools in order to get there. Structured flow-through or charity flow-through with PearTree is one of those ways to do it. It’s not complicated. It’s absolutely proven. We’ve been around for almost 20 years. We have tax rulings from both CRA and Revenu Québec, and we stand by those rulings, and we have been very successful in the last two decades, and a lot of our clients are family offices and have had a lot of success working with us.
Redmond: Thank you, Matthew. Looking for more information on flow-through shares? Visit PearTreeCanada.com. And to learn more about PearTree Canada, visit CanadianFamilyOffices.com under the vendor directory.
This story was created by Canadian Family Offices’ commercial content division on behalf of PearTree Canada, which is a member and content provider of this publication.