A Real Estate Investment Trust (REIT) is an entity that pools funds to purchase real estate or fund real estate projects. In the eyes of the average consumer, they are corporate giants that own of malls, plazas, office buildings, and apartment buildings.
REITs often have much higher distributions than traditional corporations because they receive special tax considerations. Although it is important to note that this may not necessarily convert to more cash in your pockets as distributions from REITs are not as tax efficient as distributions from corporations.
Figure 1: Riocan’s historical distribution (Source: http://investor.riocan.com/investor-relations/distribution-info/distribution-history/default.aspx)
As can be seen above, Canada’s biggest REITs, Riocan (which has ownership interests in over 350 retail properties throughout North America and over 80 million square feet of commercial property) labels its payout distributions instead of dividends. This certainly has tax implications as dividends are reported on a T5 statement and distributions are reported on a T3 statement.
Figure 2: Tax implications of various investment vehicles in Canada. (Source: http://www.dividendearner.com/reit-taxation/)
As you can see from the table above, which account you hold your REIT investment in has huge tax implications. In future posts, we will explore other facets of REITs and how to optimise your investment in them.