This is an advanced level topic.There are certain investments out there that really aren’t for everyone – this would be one of them.
The Limited Partnership moniker just means that you are limited in liability to the amount of money you have invested – i.e. you can’t be sued personally, the most you can lose is the total value of your investment. This Limited Partnership usually has a management team that will manage the money on your behalf into some specified “mandate” which is just a fancy word for describing the overall investment objective of the partnership. So for example, the mandate might be to invest in mining exploration projects – in order to find new sources of minerals for example.
Now, in Canada there are certain incentives given to companies in order to promote exploration and development of certain items – two of the main areas are “mining” and “wind power”. It provides the incentive in the form of a “Canadian Exploration and Expense Credit” which is a tax credit which can be used to reduce taxes. BUT since these companies are in the start up phase they are not yet generating any revenues with which to use the tax credits to offset. So, what they do is FLOW THROUGH the tax credits to the limited partners who can then apply the credits to their personal income taxes. They do this to help attract investors to what could be riskier than average investments (they are start-up projects remember).
Joe decides to invest in the ABC Mineral Fields Limited Partnership fund. The fund invests in a portfolio of different exploration companies looking to find new mineral deposits in Northern Ontario. Joe invests $50,000 and receives tax credits equal to $50,000 that he can apply to his personal income taxes. Since Joe earns $250,000 per year, he applies the credits in the year that he receives them and gets a tax refund of $25,000 (the highest marginal tax bracket is close enough to 50% to call it 50% for the sake of easy math)
So Joe has $50,000 invested and it only cost him $25,000.
It should be pointed out that it could take years for the fund to generate positive returns as it may take many years to explore, find and sell minerals from the project. So it is not a free lunch and ranks in the “moderate-aggressive” to “aggressive” risk tolerance range.