Registration requirements for MFD Dealers selling Terra Offering Memorandum securities
Among the Canadian jurisdictions, different requirements are placed on different types of registrants and products in the exempt market, which includes offering memorandum securities.

The provinces of Ontario and Newfoundland require Limited Market Dealer ("LMD) registration to transact in offering memorandum securities (i.e. exempt securities). In Ontario and Newfoundland, if the advisor's mutual fund dealer is also licensed as a “limited market dealer,” then the mutual fund advisor can sell Terra.

For registered firms in Alberta and Saskatchewan the registered salesperson is required to have passed the Canadian Securities Course Exam in order to sell Terra.

In other provinces, including British Columbia and Manitoba the registered dealer and advisor may be able to sell exempt securities, including Terra without any additional registration.

For more information, please contact Terra or your provincial securities regulator.

Investor eligibility requirements for Terra Flow-Throughs?
To subscribe for Terra Funds, the investor must be a Canadian resident or corporation and (1) qualify as an accredited, eligible or sophisticated investor; and (2) invest the required minimum of $10,000.

An individual qualifies as an accredited or eligible investor by meeting a financial test (income or asset). Sophisticated investors do not have to meet either test.

The monetary thresholds in the “accredited investor” or “eligible investor” definitions are intended to create “bright-line” standards using an asset or income test. These standards vary by province. Investors who satisfy these monetary thresholds will qualify and may purchase Terra.

Ontario Residents
Investors resident in Ontario may only purchase Terra if they qualify as an accredited investor or sophisticated investor.

All Other Provincial Residents
Investors resident in all other provinces other than Ontario can but need not qualify as an accredited investor to purchase Terra. Investors in these provinces may also qualify as an eligible investor (i.e. see Eligible Investor column in Table) and purchase Terra.

To determine if you are a qualified investor, see Eligibility Criteria for Investors.

Difference between a tax deduction & tax credit
Tax deductions are expenses which are subtracted from gross income to calculate taxable income. The actual amount investors save with deductions depends on their personal tax rates. For example, if you pay tax at the highest marginal rate of 46.41%, one dollar of tax deduction has 46 cents of “cash value” to you.

Tax credits are amounts subtracted from taxes owed. Tax credits reduce taxes payable to the same extent for all taxpayers, regardless of their income level and marginal tax rate. A dollar of tax credit has a dollar of “cash value” to you.

To stimulate investment in mineral exploration, the Federal Government introduced a temporary 15% tax credit, which is only available for mining flow-through shares. To distinguish mining flow-through shares which offer this tax credit from “regular” flow-through shares, these shares are generally known as “super” flow-through shares. This tax credit was introduced in October 2000 and was recently extended in the most recent Federal Budget to March 31, 2008.

Tax Deduction Carry-back Strategy
Investors who have limited income this year may still be interested in acquiring a flow-through investment because the tax deductions can be carried back, up to 3 years.

For example, a taxpayer who sold a business or property, or received a substantial bonus in any of the 3 prior years and paid a large amount of tax, can still benefit from the 2008 tax deductions provided by Terra’s flow-through limited partnership.

A taxpayer must first apply any tax deductions to reduce his or her 2008 income to zero. The balance may then be carried back up to 3 years (i.e. as far back as 2005) to allow the taxpayer to reclaim tax previously paid in those years. Taxpayers, however, must make sure that they acquire enough deductions so that there are still sufficient tax deductions to carry back to prior years. Tax deductions may also be carried forward 7 years and tax credits (if any) may be carried forward 10 years.

Any “non-refundable” federal tax credit will not be available in the current year if the income is brought to zero, but can be carried back 3 years. Any refundable provincial tax credit (i.e. Ontario, BC) may be used to reduce taxes otherwise payable in the current year.

The taxpayer may choose which of the past 3 years he or she wishes to apply the carry-back to. Consideration should be first given to the earliest year (i.e. 2005) as that year will not be available for carry-back next year.

Keep in mind that some tax is always payable because of the Alternative Minimum Tax (“AMT”) calculation. Each investor is urged to consult with their own qualified tax expert to determine the implications of any AMT amounts owing.

Ideal Candidates
Taxpayer/ Investor with:
• Large taxable income in the past 3 years.

Flow-Through RRSP/RRIF Strategy
Like RRSP's, flow-through shares are one of the last officially sanctioned tax-advantaged investments still available to investors.

Investors that want a tax efficient strategy for making RRSP withdrawals now can lower the effective tax rate by investing in a flow-through limited partnership.

For a comparison of RRSP Withdrawals using Flow-Through, see RRSP/RRIF Strategy for Investors.

Flow-Through Charitable Donation Strategy
Like RRSP's, flow-through shares are one of the last officially sanctioned tax-advantaged investments still available to investors.

With the recent introduction of new rules for donating securities, investors gain another tax advantage making it more advantageous to donate shares rather than cash.

As a result of this change investors now receive two tax write-offs; one from the tax savings on the purchase of a Flow-Through LP and the other from the donation of mutual funds shares provided by this investment.

For a comparison of cash vs. share donations, see Charitable Donation Strategy for Investors.

Capital Loss Carry-forward Strategy
Investors sometimes choose to crystallize losses so that a capital loss strategy can be used to gain maximum tax benefit for sheltering past or future capital gains. A flow-through investment provides investors the opportunity to apply capital losses against future capital gains that will be owing on the flow-through investment.

The Income Tax Act requires capital losses to be first applied against capital gains realized in the current year. If there is any remaining balance, the net capital losses can be used to either reduce taxable capital gains in any of the three preceding years, or in any other future year.

Capital losses can only be applied against capital gains—and if you have a net capital loss for the year, it can be carried back three years and/or carried forward indefinitely, to be applied against capital gains realized in those years. For example, if you realized a net capital loss in 2006 or prior year and have no realized net gains in any of 2003-2005, you can still carry forward this loss and apply it to the future capital gains owing on your flow-through investment. If you do have realized net gains in 2003-2005, file a form T1A to carry the loss back to those years and recover the related tax.

The best strategy is to carry the losses back to the earliest year in which you have capital gains before it falls out of the three year window. For example, the earliest date allowed to carry back 2006 losses is 2003.

Transferring Capital Losses Between Spouses
If you don’t have capital gains this year or the previous three years, but your spouse or common-law partner does, it is possible to transfer capital losses to these individuals.

First, the investment is sold to crystallize the capital loss. Immediately afterwards the spouse or common-law partner buys the exact same amount of the identical investment.

The spouse or common-law partner then sells the investment after waiting at least 31 days. The capital loss realized on your sale will be denied under the superficial loss rules and instead added to your spouse or common-law partner’s adjusted cost base, thereby transferring the capital loss.

Ideal Candidates
Investors with:
• An investment loss or those who are planning on selling their investments at a loss, and who have little or no capital gains in the foreseeable future.

The information contained on these pages is strictly for information purposes and should in no way be regarded as tax advice. We recommend that investors consult with their tax advisor to determine the optimal use of their tax deductions and applicable tax credits, as well as, the impact, if any, of any alternative minimum tax. This information is provided "as is" without warranties of any kind, express or implied, including accuracy, timeliness and completeness.

Flow-Through Premiums and their importance
By paying a lower premium for flow-through shares more money is available for investment. In other words, more shares may be acquired for the same invested amount.

Terra is better able to pay lower premiums on average because we are only interested in acquiring a limited number of companies and therefore can be more selective in our investments. By carefully managing the size of the portfolio we are better able to manage the premiums paid, allowing for a increased likelihood of greater returns.

The average premiums paid by Terra in each of the last years is as follows:

Why year round investing is advantageous
It is a misconception that all the best investments are only made during specific months in the year.

Firms issue flow-through shares at different times throughout the year for many reasons which include:

• commodity cycle and demand for the particular resource the firm is developing
• management’s assessment of their financing needs for projects under development
• management’s assessment for stock dilution
• investor demand

Because Terra Flow-Through LP’s are diversified we are able to consider and invest in mining & energy flow-through issues that meet our stringent requirements as they arise.

Terra’s goal is to invest in the best 30 firms regardless of their timing.

Explaining out of pocket cost
The tax savings from buying flow-through shares represent a substantial reduction in an investor’s “out of pocket” cost (also commonly referred to as money at-risk). This lower, net cost is commonly referred to as the money at-risk or capital at-risk. It follows that the more the tax savings, the lower the money at-risk. Because Terra provides more tax deductions (plus additional tax credits) our fund is among the lowest cost funds in the industry.

Corporate Use of Flow-Throughs
Corporations can own flow-through limited partnerships. A flow-through investment is particularly attractive if the corporation has (1) capital loss carry-forwards that can be used to offset the resulting capital gain on the redemption or the disposition and/or (2) plans to make a tax-free capital dividend account payout to shareholders.

The following example shows how an Individual Taxpayer can use a $100,000 flow-through limited partnership investment both personally and through a wholly owned company, ABC Enterprises. This example assumes the Individual Taxpayer has taxable income taxed at the highest marginal rate.

Example for an Alberta Corporation

Step 1: Individual Taxpayer invests $100,000 in a flow-through limited partnership and receives a tax saving of approximately $39,000 in the first year. Additional tax deductions in year 2 will also apply.

Step 2: After these initial tax benefits have been received by the Individual Taxpayer, the flow-through limited partnership units or the mutual fund shares are transferred into ABC Enterprises and an election is made under subsection 85(1) of the Income Tax Act to transfer the investment at the adjusted cost base. If the investment has an adjusted cost base of approximately zero there should be no income tax triggered on the transfer.

Step 3: The corporation ABC Enterprises then sells or redeems the investment. This may be done while the investment is still a flow-through investment, or after it has “matured” into a mutual fund. Assuming the fair market value of the investment is the same as the original investment, the result is a $100,000 capital gain, $50,000 of which is taxable, although this gain is sheltered by the corporation’s capital losses. One-half of any prior capital losses and the $50,000 non-taxable portion of the capital gain would be included in ABC Enterprises’ Capital Dividend Account. A positive balance, if any, in the Capital Dividend Account may then be paid as a tax-free dividend to Individual Taxpayer.

In summary, the original $100,000 investment will provide:

1) A tax saving of $39,000 to Taxpayer in Year 1. Additional deductions in Year 2;
2) A $50,000 capital gain to ABC Enterprises that can be sheltered by its capital losses;
3) And if applicable, a tax-free dividend to Individual Taxpayer from the Capital Dividend Account of ABC Enterprises.