Going GREEN without bleeding RED
Sunday, December 12th, 2010Tax break on flow-through shares cuts risk of renewable-energy investments
It’s often argued that money and the environment don’t mix when it comes to investing. While we all may try to love Mother Nature the best that we can, many of us have investment portfolios that tell a different story.
Let’s face it: Many equity-based mutual fund portfolios owned by Canadians are heavily invested in oil and gas and mining, or financial institutions that receive a significant amount of revenue from financing these sectors.
Even the socially responsible investment funds — be it mutual funds or the handful of Canadian exchange-traded funds — are not very focused on up-and-coming green firms.
Then again, it’s tough to blame anyone serious about investment returns for shunning the green-tech and renewable-energy sectors. For the most part, these firms are in their fledgling phases. They have promising ideas, but they lack the funding to get off the ground in many cases because the markets for their products and services are not yet fully developed, either.
“I think there is a lack of knowledge about and of capital for these companies,” says Stephen Whipp, a board member with the Social Investment Organization and investment adviser with Manulife Securities in Victoria.
…”We have a longstanding history in Canada since ’54 of supporting the development of energy and mining with the use of flow-through, but what a lot of people don’t know is we’ve had this green infrastructure since 1996 that investors can participate in the green sectors of energy,” says Sheldon Stier, president of Manitoba exempt market investment dealer Hatch Alternative Investments.
Flow-through share offerings are a way for companies to attract investment by passing on the tax incentive they receive to investors, reducing the amount of invested capital at risk.
On an investment of $10,000, an investor at the highest marginal tax rate would receive about $4,640 back in taxes. Even more tax savings could be realized the following year by investing the credit money into RRSPs, providing an additional tax refund.
Stier says it’s also possible to receive further tax savings after the flow-through shares’ tax deductions have been realized because the shares may become eligible for an RRSP. But investors should seek expert tax advice in this regard to be sure they abide by the rules under the Income Tax Act, he adds.
Tax incentives aside, however, the renewable-energy sector is becoming a viable investment sector, he says.
And unlike conventional resource exploration, in which the firms aim to discover resources that, if found in large enough quantities, can then be sold to another company to develop, renewable energy firms can often quantify the potential upside of their ventures, says Bob Fraser, CEO of Syntaris Power, a B.C.-based green-tech firm that has a flow-through share offering available in Manitoba through Hatch.
Syntaris develops small hydroelectric projects, called run-of-river. These involve diverting a portion of a stream on a steep mountainside. The rerouted water flows into a pipe called a penstock down a precipitous grade to a small wheelhouse at the bottom.
Fraser says the company is able to project its potential output by studying stream-flow outputs over several years.
“For a very small amount of money, we can know what the energy output will be and what the projects will look like,” he says.
Of course, being able to project output is one thing. Having a market to sell the energy to is another.
Because of new legislation to promote renewable energy, Fraser says run-of-river and other green energy projects now have growing markets.
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