The Globe and Mail’s Fabrice Taylor recently wrote about an interesting alternative to flow-through funds: Oil & Gas Royalty Limited Partnerships. Unlike traditional flow-throughs, royalty LPs invest in joint venture drilling subsidiaries with established resource companies. These funds seem to address the biggest issue with typical flow-through funds: if you strip out the generous tax incentives, there is little investment merit in early-stage, exploration companies. Royalty LPs, on the other hand, have low exploration risk.

The royalty fund highlighted by Mr. Taylor was the WCSB Oil & Gas Royalty Income Partnership and it has some key differences with traditional flow-through funds. The tax deductions are spread out over five years with only half the deductions available in the first year. The partnership would be wound down after four years instead of the typical two. However, the fund aims to provide an ongoing income stream through cash distributions. While the WCSB Partnership is not a cheap fund, as an investment, it is more appealing than traditional flow-throughs.