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Invesco Water Resources ETF T.PHO


Primary Symbol: PHO

The investment seeks to track the investment results (before fees and expenses) of the NASDAQ OMX US Water IndexSM (the underlying index). The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index. The underlying index seeks to track the performance of companies that create products designed to conserve and purify water for homes, businesses and industries. The underlying index may include common stocks, ordinary shares, American depositary receipts (ADRs), shares of beneficial interest and tracking stocks. The fund is non-diversified.


NDAQ:PHO - Post by User

Bullboard Posts
Comment by poneon Jun 05, 2015 4:32pm
131 Views
Post# 23802385

RE:RE:RE:R&D Spin-off Answer

RE:RE:RE:R&D Spin-off Answer
billy4325 wrote: Looks like instead of paying the R&D and related expenses directly, PHO pays expenses to the R&D company (which is revenue to that company who uses the funds for research expenses).  I guess there could be funding from other parties, but that doesn't seem to be the point of the company from what I can tell. 

For example, from the PHO 2014 financial statements:

Charges from:                                                                                              2014            2013
Products & services charged by Photon Control R&D Ltd.        $   212,497   $ 493,452
Engineering & R&D services charged by Photon Control R&D     916,550      792,026
Royalty expenses charged by Photon Control R&D Ltd.              1,262,509      922,292

There's a big SR&ED (scientific research and experimental development) tax benefit to doing it this way.  If the R&D expenses are paid in PHO, they would get a 20% non-refundable federal tax credit (it was recently brought down to 15%) plus likely some provincial tax credits.  This would have been useless for the company at that time since they were not taxable and had lots of non-refundable SR&ED tax credits and non-capital loss carryforwards at the time.  (In fact, the company still had the unused SR&ED tax credit of $1,791,011 at the end of 2014 which has been outstanding since 2008, despite recent profitability).  

By using a CCPC, they would be eligible for the 35% federal refundable tax credit, which they would actually get cash back for, even if the company isn't profitable.  I assume there would also be some refundable provincial tax credit (for example in Ontario it's 10%).    That's pretty significant, consider in 2007 (last full year before the R&D company was set up), R&D expenses were $2,589,741.

So at least from a tax perspective, it looks like a pretty good idea.


Okay, but look at the numbers you are using.   They are trying to get a 10% tax credit savings on $1.1M of R&D, and in exchange for that shareholders now need to pay $1.2M of "royalty" to a related-party entity?

How was losing $1.1M in expenses to save $100K in tax credits a good deal for shareholders?

I don't doubt that this affiliated R&D company had a purpose in 2008 when they were near death (apparently).   But at this point the situation is different and the existence of that entity looks like it serves the interests of the related parties that set it up more than it serves the interests of shareholders?
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