tax advantage of income trust REIT ?

[Picard]

Does anyone know how to take advantage of real estate income trust (REIT). It is available for RRSP or non-RRSP plan. Investor receive dividends from the investment. I already know how to invest in RRSP. I just don't know if one invest in non-RSP plan, How does it affect my tax rate? How am I suppose to turn REIT to tax shelter????

 

[Fortunato]

Does anyone know how to take advantage of real estate income trust (REIT). It is available for RRSP or non-RRSP plan. Investor receive dividends from the investment. I already know how to invest in RRSP. I just don't know if one invest in non-RSP plan, How does it affect my tax rate? How am I suppose to turn REIT to tax shelter????

Most REITs you'd be interested in trade on the exchanges, just like a stock, and you can buy them with a brokerage account. Provided they meet current RSP eligibility requirements, you can buy them in a self directed RRSP.

Technically, REITs pay out a "distribution", not a dividend... this distribution may be part earnings (which you pay tax on) or part return of capital (which you do not, but you need to adjust your cost base by this amount). This return of capital is one aspect of the "tax shelter"... the other comes from the structure itself, when you compare it to equities (a business in trust format pays no tax, but you pay full tax on the distributions you receive... with a corporation, the company pays corporate tax, and you pay an additional tax on the dividends paid to you, although at a lower rate, but the combination of these taxes can be higher). In addition, some trusts can pass on certain business deductions to reduce the taxes you pay....

Within an RSP, this distinction is irrelevant (you don't pay taxes on the earnings, you pay taxes on the entire amount once you withdraw it), so some argue that you lose part of the benefit of a REIT by holding it in the RSP because it will all be taxed as income in the end (that does not mean that there aren't still compelling reasons to do this, though...).

If you buy a REIT outside of the RSP, you will recieve an information slip (right about this time of year) breaking out the distribution amounts for your tax return, as well as any other pass-through benefits that might occur.

Best regards,

F.

 

[Picard]

one more question

Thanks for the tip fortunato. It is very informative. I have one more question. Let's assume the REIT company gives me back 1000.00 as distribution payment. Is this money tax free?

 

[Fortunato]

Thanks for the tip fortunato. It is very informative. I have one more question. Let's assume the REIT company gives me back 1000.00 as distribution payment. Is this money tax free?

Probably not.

The $1,000 will likely be a combination of "earnings" and return of your investment capital (let's say $900, and $100 respectively). The $900 earnings would be fully taxable as income in your hands. The $100 return of capital is not taxable as income, but you need to factor it in to your cost base when you calculate capital gains/losses on disposition... so, in this case, let's say you paid $10,000 for the units; with the return of capital of $100 from the distribution, your "cost base" would now be $10,000 - 100 = $9,900. If you sold the units then for $11,000 your capital gain would be higher ($11,000 - 9,900) at $1,100, which will then be taxed at the lower inclusion rate....

The REIT will break these amounts out for you each year (earnings vs. return of capital), but you need to track the effects on your "cost base" yourself....

Best regards,

F.

 

[Picard]

hey fortunato, are you a financial planner? you seem to know REIT. Is it best to keep REIT in RRSP? From what you told me about this tax issue, it seems convoluted.