Sprott Flow-Through Limited Partnerships

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1 Sprott Tax-Assisted Investments Sprott Flow-Through Limited Partnerships

2 Natural resources an essential element of a wellstructured investment portfolio Adding natural resource investments to your portfolio may offer important benefits, including: A hedge against inflation and currency devaluation Enhanced overall portfolio diversification an efficient way to capitalize on the higher economic growth rates of emerging markets Flow-through shares offer Canadian investors an opportunity to invest in the natural resource sector at a significantly reduced after-tax cost. 1

3 What are flow-through shares? The Federal Government allows Canadian resource companies that invest in the oil and gas, mining and renewable energy sectors to fully deduct certain exploration expenses, Canadian Exploration Expenses (CEE). To raise capital for exploration, those companies often issue flow-through shares and renounce the CEE to the purchasers of those shares. The shareholders are then able to deduct the CEE against their own income. Benefits of investing in flow-through shares Tax Savings The entire cost of flow-through shares is tax-deductible in the year they are purchased. In addition, the proceeds from the disposition of those shares are taxable as capital gains and taxable only at a rate 50% of regular income. Tax Deferral It is often advantageous to pay taxes in the future rather than today. Tax Efficiency Investing in flow-through shares effectively converts income into capital gains, allowing investors to take advantage of any capital loss carry-forwards. Who should invest in flow-through shares? Attach your Schedule 1 (federal tax) and Form 428 (provincial or territorial tax) here. Also attach here any other schedules, information slips, forms, receipts, and documents that you need to include with your return. Enter your total income from line 150. Pension adjustment (box 52 of all T4 slips and box 034 of all T4A slips) Registered pension plan deduction (box 20 of all T4 slips and box 032 of all T4A slips) RRSP deduction (see Schedule 7, and attach receipts) Annual union, professional, or like dues (box 44 of all T4 slips, and receipts) Universal Child Care Benefit repayment (box 12 of all RC62 slips) Child care expenses (attach Form T778) Disability supports deduction Business investment loss Moving expenses Allowable deduction Support payments made Total 230 Allowable deduction 220 Carrying charges and interest expenses (attach Schedule 4) 221 Deduction for CPP or QPP contributions on self-employment and other earnings (attach Schedule 8) 222 Exploration and development expenses (attach Form T1229) 224 Other employment expenses 229 Clergy residence deduction 231 Other deductions Specify: 232 Add lines 207 to 224, 229, 231, and Line 150 minus line 233 (if negative, enter "0") This is your net income before adjustments. 234 Social benefits repayment (if you reported income on line 113, 119, or 146, see Line 235 in the guide). Use the federal worksheet to calculate your repayment. 235 Line 234 minus line 235 (if negative, enter "0") If you have a spouse or common-law partner, see Line 236 in the guide. This is your net income. 236 Flow-through investing is most suitable for investors taxable at the highest marginal tax rates who can accept the risk of investing in small to mid-size resource companies. Net income Deduction for elected split-pension amount (attach Form T1032) Gross

4 Flow-Through Limited Partnerships Investors can access the flow-through market by purchasing shares directly or by investing in a flow-through limited partnership. Flow-through limited partnerships are investment vehicles that add three important benefits to the tax advantages of flow-through investing: 1) professional management, 2) access to a broad range of flow-through issues, 3) diversification. The risk of investing in smaller resource companies may be reduced when experienced, professional investment managers select a well-diversified portfolio of companies. How do work? Flow-through limited partnerships provide the same tax benefits as investing in flow-through shares directly. The amounts invested are generally fully or almost fully deductible against taxable income in the year the investment is made. The illustration below shows how work. Invest in flow-through limited partnership Money from partnership is invested in Canadian resource companies INVESTORS/ LIMITED PARTNERS FLOW-THROUGH LIMITED PARTNERSHIP CANADIAN RESOURCE COMPANIES CEE is transferred to investors/limited partners for tax deductions Canadian resource companies renounce generated CEE Investors purchase units of a flow-through limited partnership and the net proceeds are used to purchase the flow-through shares of resource companies. The companies renounce their CEE to the limited partnership, which allocates the CEE to its investors. The investors can then deduct the CEE against their income. Most have a life span of one to two years, enough time to allocate most of the tax deductions to investors. The adjusted cost base of the units (ACB) is reduced by the tax deductions and increased by any capital gains from the investments sold within the limited partnership portfolio. Those capital gains are allocated to investors annually. At termination, the flow-through limited partnership unitholders receive shares of an open-ended mutual fund corporation and the rollover transaction is completed without triggering an immediate tax liability. This allows investors to defer their tax liability further, until they redeem out of the mutual fund corporation. 3

5 Sprott Flow-Through Limited Partnerships and Corporate Class Funds Sprott Flow-Through Limited Partnerships offer investors the benefits of flow-through investing and a tax-deferred rollover to Sprott Corporate Class Funds, an open-ended mutual fund corporation. Once the Sprott Flow-Through Limited Partnership is terminated, investors receive shares of Sprott Resource Class. Sprott Resource Class is part of Sprott Corporate Class Inc., a suite of investment funds set up within a corporate structure. Each share class represents a different mandate, including income, balanced, equity and precious metals. Investors can switch from one class of shares to another without triggering an immediate taxable event. Sprott Corporate Class provides an ideal solution for investors who want to further extend the capital gains tax deferral from Sprott Flow-Through Limited partnership while building a well-diversified portfolio. Sprott Corporate Class Funds Equity Funds Sprott Canadian Equity Class Sprott Enhanced Equity Class Sprott Enhanced U.S. Equity Class Sprott Focused Global Dividend Calss Sprott Focused US Dividend Class Sprott Gold & Precious Minerals Class Sprott Real Asset Class Sprott Resource Class Sprott Silver Equities Class Fixed Income Funds Sprott Diversified Bond Class Sprott Short-Term Bond Class Bullion Funds Sprott Gold Bullion Class Sprott Silver Bullion Class Balanced Funds Sprott Enhanced Balanced Class Sprott Focused Global Balanced Class Sprott Focused US Balanced Class Sprott Tactical Balanced Class 4

6 Sprott Flow-Through Limited Partnerships and tax planning strategies Below are some flow-through tax planning strategies. To simplify the illustration, we have made a number of assumptions: i. The flow-through limited partnership incurs no capital gains during the investment period. In practice, capital gains are often triggered by the flow-through limited partnership when flow-through shares are sold in the portfolio. ii. The value of the flow-through investment at maturity is the same as its original purchase price. In practice, the value of the flow-through shares of each company may rise or fall during the period of investment, which will change the value of the flow-through limited partnership. iii. The investor pays taxes at the 46% marginal rate and is single. Tax rates differ by province. See Appendix 2 for a listing of the top marginal tax rates by province for It is important to consult a tax advisor to ensure that the strategies are appropriate for an individual investor s situation. 1. Reduce Taxes The entire amount invested in Sprott Flow-Through L.P. is expected to be tax-deductible in the year purchased. 1 The proceeds of the disposition of those shares are taxable as capital gains and taxable only at a rate of 50% of regular income. Here is an example of how this strategy works: Investor buys $10,000 of Sprott Flow-Through L.P. and deducts 100% of the investment against personal income. Upon termination of the Flow-Through LP and its rollover to Sprott Resource Class, he chooses to sell all Class shares and pay capital gain taxes on 50% of the proceeds. Using Sprott Flow-Through L.P. as part of an annual tax management strategy could save an investor $2,300 in taxes with each $10,000 invested, and could also help reduce the effect of the cyclicality of the resource sector. year 1 year 3 total Sprott Flow-Through L.P. investment $10,000 $10,000 Tax savings $4,600 $4,600 Sprott Resource Class redemption $10,000 $10,000 Capital gains tax payable ($2,300) ($2,300) After-tax cash flow ($5,400) $7,700 $2,300 After-tax return 43% 1 Subject to certain assumption, see prospectus for details. 5

7 2. Defer Taxes It is often advantageous to pay taxes in the future rather than today, especially if in the future, the investor is in a lower marginal tax bracket. Here is an example of how this strategy works: An investor has a long-term objective to defer taxes and generate investment income. She buys $10,000 of Sprott Flow-Through L.P. every year for 10 years, and as the Flow-Through L.P.s mature, she switches to Sprott Enhanced Equity Class, Series T, part of Sprott Corporate Class Inc. The Class has a target distribution of 6% per year and with its focus on reducing downside risk while providing long-term growth, it is an ideal core equity fund for riskaverse investors. Each of the 10 years, the investor saves $2,300 in taxes, and in year 3 begins to receive monthly distributions. Since the adjusted cost base (ACB) of the investor s Sprott Enhanced Equity Class is $0 (because of the Sprott Flow Through tax deductions), the distributions are taxed as capital gains. At the end of the 12 years, when the last holding of the Sprott Flow-Through L.P. matures, the investor holds a $100,000 investment in Sprott Enhanced Equity Class, received cumulative tax savings of $46,000 and a cumulative monthly income of $25,410. The investor is now in a lower tax bracket of 30% and her capital gain tax liability on the sale of Class shares is only $15,000. YEAR Sprott Flow Through L.P. $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 investment Tax savings $4,600 $4,600 $4,600 $4,600 $4,600 $4,600 $4,600 $4,600 $4,600 $4,600 Net amount invested $5,400 $5,400 $5,400 $5,400 $5,400 $5,400 $5,400 $5,400 $5,400 $5,400 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 Sprott Enhanced Equity Class, Series T 2 Distributions 6% per annum $600 $1,200 $1,800 $2,400 $3,000 $3,600 $4,200 $4,800 $5,400 $6,000 Taxes payable on distributions 3 ($138) ($276) ($414) ($552) ($690) ($828) ($966) ($1,104) ($1,242) ($1,380) After tax distributions received $462 $924 $1,386 $1,848 $2,310 $2,772 $3,234 $3,696 $4,158 $4,620 2 Assumes that the value of Sprott Enhanced Equity Class does not change and the distributions are at 6% per annum. 3 Targeted amount per annum, not guaranteed. 6

8 3. Utilize Capital Losses Investing in flow-through shares effectively converts income into capital gains, allowing investors to take advantage of any capital loss carry-forwards. Here is an example of how this strategy works: An investor buys $10,000 of Sprott Flow-Through L.P. and deducts 100% of the investment against personal income. Upon termination of the Flow-Through L.P. and its rollover to Sprott Resource Class, the investor sells all Class shares. The investor also has $10,000 of unused capital losses, which he uses to offset the capital gains from the disposition of the Flow-Through, further enhancing the after-tax returns. year 1 year 3 total Sprott Flow-Through L.P. investment $10,000 $10,000 Tax savings $4,600 $4,600 Sprott Resource Class redemption $10,000 $10,000 Available capital losses $10,000 $10,000 Capital gains tax $0 $0 After-tax cash flow ($5,400) $10,000 $4,600 After-tax return 85% 4. Improve Tax-Efficiency of Charitable Donations By investing in a flow-through limited partnership and donating the shares to a registered charity, investors can further reduce the cost of their charitable giving. Here is an example of how this strategy works: An investor buys $10,000 of Sprott Flow-Through L.P. and deducts 100% of the investment against personal income. Upon termination of the Flow-Through, she donates the shares of Sprott Resource Class to a registered charity and receives a donation tax credit of $4,600. The donation also triggers a capital gains liability for the investor, resulting in an after-tax cost of the donation of approximately $3,100. Year 1 Year 3 Sprott Flow-Through L.P. investment $10,000 Tax savings $4,600 Sprott Resource Class donation $10,000 Capital gains tax $2,300 Donation tax credit $4,600 Combined tax benefits $6,900 After tax cost of donation $3,100 7

9 5. Shelter Business Income Investors who are controlling shareholders of private Canadian corporations can use flow-through investments to shelter the corporation s income. The tax benefits would be similar to the tax saving and tax deferral benefits available to individual investors. If the corporation has available capital losses, the shareholder may consider investing in Sprott Flow-Through L.P. personally, then exchanging the units of the Flow-Through or shares of the Sprott Resource Class on a tax-free rollover basis for shares of the corporation (subsection 85 (1) of the Income Tax Act, Canada). The disposition proceeds may then be sheltered by the corporation s available capital losses and, depending on the circumstances, distributed to the shareholder on tax free basis. The effectiveness of any of those strategies depends on the corporation s specific circumstances, and should be carefully reviewed by a professional tax advisor. 6. Reduce Taxes On Lump Sum Income Payments Investors who receive a one-time lump sum income payment such as a severance or a bonus, can use Sprott Flow Through L.P. to reduce their tax liability. Since the entire amount invested is tax-deductible in the year of purchase, as illustrated in Example 1, every $10,000 of Sprott Flow-Through L.P. generates tax savings of $4,600 for that year. 8

10 appendix 1 break even calculation Assuming Highest Marginal Tax Rates BC AB SK MB ON QC NB NS PE NL NU NT YT Investment $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 Less: tax savings from $530 $533 $533 $560 $595 $592 $646 $600 $571 $536 $494 $523 $533 deductions Tax on capital gains $26 $27 $27 $28 $30 $29 $29 $30 $28 $27 $25 $26 $27 Money at risk $497 $493 $493 $468 $438 $437 $383 $430 $458 $490 $530 $505 $493 Breakeven proceeds of disposition $652 $649 $649 $626 $594 $596 $522 $589 $616 $646 $682 $658 $649 appendix 2 top marginal tax rates by province for 2016 Nova Scotia 54.00% Quebec 53.31% Ontario 53.53% Prince Edward Island 51.37% New Brunswick 58.75% Manitoba 50.40% British Columbia 47.70% Saskatchewan 48.00% Northwest Territories 47.05% Yukon 48.00% Newfoundland and Labrador 48.30% Nunavut 44.50% Alberta 48.00% 9

11 The risks associated with investing in a Fund depend on the securities and assets in which the Fund invests, based upon the Fund s particular objectives. There is no assurance that any Fund will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Fund will be returned to you. The Funds are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Fund s prospectus before investing. Sprott Asset Management LP is the investment manager to the Sprott Funds (collectively, the Funds ). Important information about these Funds, including their investment objectives and strategies, purchase options, and applicable management fees, performance fees (if any), and expenses, is contained in their prospectus. Please read these documents carefully before investing. Commissions, trailing commissions, management fees, performance fees, other charges and expenses all may be associated with investing in the Funds. This communication does not constitute an offer to sell or a solicitation to purchase securities of the Funds. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Fund may be lawfully sold in their jurisdiction. The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action. 10

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TAX-ASSISTED INVESTMENTS

TAX-ASSISTED INVESTMENTS What are flow-through shares? The Federal Government allows Canadian resource companies that invest in the oil and gas, mining and renewable energy sectors to fully deduct certain