The limited partnerships invest the available funds in oil and natural gas companies that spend the funds on costs that qualify as Canadian Exploration Expense ("CEE") or Canadian Development Expense ("CDE") that can be renounced as CEE, thereby providing 100% deductibility for income tax purposes in the current year. This amount is then allocated by the limited partnership to the limited partners on a pro-rata basis.

When flow-through shares are sold, the net proceeds represent a capital gain of which only 50% is included in income in accordance with the Canadian Income Tax Act. In essence, the investor receives a tax deduction at the full taxation rate and reports capital gains of which only 50% are included in taxable income. The lowering of the income tax rates that has occurred over the past few years has also benefited the returns for limited partners.

Investors in EnerVest Flow-Through Limited Partnerships receive T5013 forms detailing their deductions and for filing their income tax returns.

The tables to the right illustrate how the taxation of FTS will work based on a Canadian taxpayer in the 50% tax bracket and with 50% of capital gains taxable.  For income tax purpose the FTS have a zero cost base when sold, therefore all proceeds from the eventual sale are treated as capital gains.

As a result of the tax deductibility of the FTS investments, purchasers should consider the after tax implications from three inevitable scenarios:

• A gain in share values.
• No change in share values.
• A loss in share values.