Toronto-based front Street Capital Inc. is looking to expand the types of assets that can be bundled into flow-through investments to boost their tax-effectiveness.

The company’s new Flow-Through 2006-1 Limited Partnership will focus mainly on traditional flow-through shares, but it can also invest a slice of its assets in qualifying environmental trusts, which have been been around since 1999. Front Street’s offering marks the first time qualifying environment trusts have been included in a public offering. Front Street is seeking a maximum of $125 million via the sale of five million units at $25 each.

A QET partnership is the means by which Front Street will invest in a so-called qualifying “QET property.” QET partnerships are formed to ensure that resources companies fulfil their reclamation obligations, “designed to ensure sustainable establishment and utilization of renewable resources on sites where excavation or other disturbances have occurred,” according to the Front Street prospectus.

An investment in a QET partnership will “secure the reclamation obligations of [resources] companies,” the prospectus says. The resources company retains the overall reclamation obligation, and the QET investment will be made in such a way that the partnership is not on the hook for environmental liabilities.

For investors, the attraction is the tax benefit that a QET investment can bring to a flow-through limited partnership.

With flow-throughs, unclaimed tax deductions that are not used by junior resources and exploration firms are flowed out to investors, who can apply these deductions to their own income — whatever its source. The tax savings can substantially reduce the amount of money investors are out of pocket. But because flow-through offerings depend on the success of exploration programs, they are regarded as suitable only for clients comfortable with investment risk.

According to the Front Street prospectus: “The contribution by a QET partnership to a QET is intended to be fully deductible in the year of contribution.” In this way, the deduction will make its way to the flow-through partnership and from there to investors. Without a QET partnership, amounts contributed by a resources firm for its reclamation obligations are deducted over the life of the resources project.

Front Street has limited itself to investing 10% of the 2006-1 LP’s assets in QETs. As the prospectus notes: “There is currently no market for QET partnership units and there is limited public information about QET partnerships.”

Other flow-through issuers are awaiting the outcome of Front Street’s initiative. Dennis da Silva, a managing director with the resources group at Toronto-based Middlefield Capital Corp. , says his company looked “quite seriously” at including QETs in its offerings.

“It’s an interesting concept, [and] not one we would say has no investment merit,” he says.

“It is not as proven as traditional flow-throughs, which have been around since 1983,” he adds. “We are a bit on the sidelines. We want to let a few of them happen. I don’t want to be the guinea pig.

“We hope [Front Street’s deal] works and becomes successful because it will give us a deeper market of investment opportunities. And [if that happens] it will give us access to larger, more liquid producing companies. The Incos and the Falconbridges of the world would qualify for this.”

Flow-through share funds have been hot commodities so far in 2006, and many issues have been brought to market. For instance, at the end of January, Toronto-based CMP 2006 Resource Limited Partnership closed its offering with $200 million in the kitty. The issuer sold 200,000 units at $1,000 a unit. Goodman & Co. Investment Counsel Ltd. will manage the partnership.

Creststreet Capital Corp. of Toronto recently raised $40 million for a flow-through fund that will invest in oil and gas and renewable energy.

Middlefield is also in the market with the MRF 2006 Resource Limited Partnership. The issuer is seeking a maximum of $100 million. The manager will invest in oil and gas, mining and renewable energy. IE