Canadian Real Estate Investment Trusts

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The concept of Real Estate Investment Trusts (REITs) began in the United States, and covered companies that owned and managed real estate (equity REITs) and those that financed it in various ways (mortgage REITs).

Canada picked up on the ideas, but there they are not corporations, but mutual fund trusts akin to other Canadian income trusts. And owning and managing real estate is their main source of income. Unlike US REITs, they don't much engage in the development of real estate.

The first REIT listed on a Canadian stock exchange was Canadian Real Estate Trust which began on the Toronto Stock Exchange in September 1993.

Canadian real estate trusts are flow through entities (FTEs). The trust pays no taxes as long as they pay out at least 90% of net profits to the unitholders. These people then are responsible for paying their individual taxes to Canada's equivalent of the IRS -- Canada Revenue Authority (CRA).

This is through the Canadian Income Tax Act.

Unlike with corporations, therefore, there is no double taxation of net revenue. This should be quite an attractive situation to investors.

Standard & Poor’s announced that it would add income trusts to its Canadian indices.

Since one form of real estate expense is depreciation, some of the money sent to unit holders is considered return of capital. Return of capital is not taxed, because it's return of capital NOT income.

(That's because depreciation is not a cash expense. It's just assumed that a given building is worth 10% less than it was last year because of wear and tear. It increases net income, and therefore increases the amount of dividends payable to the trust's unitholders.)

(In Canada, this form of depreciation is known as Capital Cost Allowance (CCA).)

However, it lowers the unit holder's cost basis in the unit. That means that they'll pay higher taxes if they ever sell it.

Moral -- don't ever sell your units in Canadian REITs. Also, consider investing in good software such as QuickBooks Online Accountant Edition. You don't want to pay a penny more to either the CRA or IRS.

On October 31, 2006 the Canadian government announced -- just after an election in which it promised to keep Canadian trust funds tax free -- that beginning in 2011 Canadian trust funds would be taxable.

This is known as the SIFT (Specified Investment Flow-Through) legislation. However, some Canadian REITs may have trouble meeting this exemption due to the nature of their assets. This is one troubling issue to Canadian real estate investment trusts.

Canadian Real Estate Investment Trusts Will Continue to Operate in 2011 and Beyond

However, this does not apply to Canadian real estate trusts, so they will remain tax-free in 2011 and beyond.

Canadian REITs fall into these categories --

Diversified

Hotel

Mortgage

Retirement

Industrial

Office

Residential

Retail

Canadian REITS Include:

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