A comeback for old tax haven

Now you can have your cake and eat it, too. That’s what Ned Goodman, Chairman of Dundee Bancorp Inc. and Chairman of the new CMP 2000 Resource Limited Partnership told a packed house of investors, investment brokers and media at the King Edward hotel on Monday afternoon. At the tail end of a 10-city tour that traversed the country, Goodman welcomed the audience with a "CMP Is Back!" sign on a 10-foot projection screen. So what is it that can get the Chairman excited enough to go on a travelling road show?

In short, it is a specialty investment product that can act as a tax haven and is designed for the everyday investor. Unlike some tax-loophole schemes - for instance, the ones involving offshore accounts - this investment is operating with the full cooperation of the Canadian government and investors know exactly where their money is going.

The CMP Limited Partnership series began in 1984 with the CMP 1984 Mineral Partnership and Company, Limited, which raised $38 million to invest in flow-through shares. Flow-through shares are a special class of shares that oil & gas, mining and base metals companies can issue and they result in a tax deduction for investors in those shares. In 1983, when Ned Goodman was trying to persuade the government to adopt this policy, flow-through shares were already at work in Australia. "Through our efforts," he says, "and the persistence of our lawyers and staff, the government finally approved the use of these shares." The argument was compelling and the government agreed to allocate certain tax advantages to encourage exploration and development in the Canadian resource sector. Thus, Dundee was the first company in Canada to make this product available, and they are credited with starting a new industry within the investment universe.

Since then, many others joined the game, like Middlefield for example, and there was more than enough money to go around. During the first CMP partnership, Dundee raised $24 million and Wood Gundy bought up an extra $14 million, feeling confident that they could sell it to the public. It worked. "It was wonderful," says Goodman. "We were giving investors a cost of 50 cents on the dollar at the start, and in Quebec, it was 10 cents on the dollar," he adds, referring to the tax breaks that investors got upon the purchase. Overall, they have raised over $1.3 billion in 16 different partnerships, dominating the market in 1987 with over $400 million raised. "Hundreds of thousands of investors including myself," Goodman says, "and not once did anyone get unwelcome scrutiny from the government."

The CMP 2000 Resource Limited Partnership is the first large-scale product in the series to be launched since 1990. "Everything was going fabulous until 1990," Goodman says, "when we realized we couldn’t offer good value to investors any longer. So we stopped." Dundee went out of the flow-through share business because the resource sector was no longer producing attractive investment returns and the market was extremely crowded with other similar offerings from other companies. Now the time is again right to bring back CMP, "a lucky name, which, by the way, does not stand for anything in particular but formed the basis for other companies to start releasing three-lettered partnership products," according to Goodman. His firm launched a pilot project in late 1999 to test the waters, and found comfort in that fund’s 38 per cent return on investment in just a few months. That told them it was a green light for CMP 2000 Resource Limited Partnership.

So, other than the tax breaks, what could make this investment attractive?

The promise of great investment returns, for one. Investing in resource companies is a speculative business, but Ned Goodman and his team of experienced managers invest in a diversified portfolio of companies that are solid, and would continue to be regardless of the results of the exploration.

As well, the tax deduction claimed by investors in the first year effectively reduces their "money at risk" to almost half of the original investment, and since the whole thing is written off the Adjusted Cost Base (ACB) of the investment is zero. If sold, the proceeds are taxed as capital gains, which currently enjoy an attractive tax treatment. Don’t pull out your calculator, we worked it out already. If the fund does no more than maintain the value of the original investment, that would translate to a 31 per cent built-in rate of return, seemingly for doing nothing. But the company expects to do much better.

Natural resource stocks are widely believed to be in a good position to provide capital gains opportunities over the next few months. These stocks, which have lagged in previous years and are always on a cycle, have not caught up with the commodity prices of the underlying commodities. In the past 16 months, the TSE Oil & Gas Producer Index has risen 38 percent whereas the weighted commodity index (one-third gas, two-thirds oil) has surged 85 per cent.

At the end of the 18-month life of the partnership, investors can roll their assets into a wide range of Dynamic mutual funds at no charge, and without triggering a taxable transaction. Ned Goodman is one of the people who has done that, with every single partnership in the past, and he says he still has his position invested in the funds.

At the end of the presentation there were hardly any questions from the audience. It seems that after doing it for so long, Goodman and company have gotten pretty good at explaining the concept. The CMP 2000 partnership is still in Preliminary Prospectus form but should be finalized within a week or two and will be available throughout the financial broker channel.

Levi Folk, Richard Webb and Peter Diplaros are Investment.com mutual fund specialists and editors of the Fund Counsel newsletter. They can be reached by e-mail at peterd@hqinvestment.com.