Qualifying Criteria for Real Estate Investment Trusts Expected to Improve in 2011
Real estate investment trusts (“REITs”) are publicly-traded trusts that are considered attractive investment vehicles because they offer an exemption from the tax on distributions from specified investment flow-throughs. In December 2010, the federal government announced several proposed changes to the income tax rules applicable to REITs, a number of which will be of significance to the commercial real estate community.
The proposed amendments are chiefly concerned with the criteria that investment trusts must meet in order to qualify as REITs. Expected to come into force in 2011, these amendments will also be applicable on an elective basis for post-2006 taxation years if certain conditions are met. A brief overview of the most notable elements of the proposed amendments is provided below:
i. Qualified REIT Property
Under the current rules, REITs are generally prohibited from holding any “non-portfolio property”, being investments other than “qualified REIT properties”, at any time in the taxation year. Perhaps most significant of the amendments is an allowance permitting these trusts to hold up to 10% of their non-portfolio property in assets that are not qualified REIT properties without losing their status.
“Non-portfolio property” typically includes:
- property used in carrying on a business; and
- securities of an entity that represent more than 10% of the equity value of the entity or more than 50% of the equity value of the security holder.
Under the current rules, “qualified REIT property” includes:
- real or immovable property;
- property ancillary to earning of rents and capital gains from dispositions of real or immovable property; and
- some types of qualifying subsidiaries.
This welcoming allowance provides a much needed degree of flexibility and safe harbour for REITs that face unexpected or unintended property issues.
ii. Source and Nature of REIT Revenue
In order to qualify as an REIT, an investment trust must meet two tests designed to determine the nature of its revenue. The current qualification rules require that at least 95% of an REIT’s revenue be derived from passive sources and that at least 75% come from certain passive real estate sources. The proposed amendments reduce the 95% passive revenue source requirement to 90% and clarify that, for both tests, revenue is to be defined as gross revenue inclusive of capital gains.
The proposals go on to clarify that, for purposes of the two thresholds tests referred to above, amounts paid by certain subsidiaries of an REIT to the REIT will have the same character as it had when it was received or earned by the subsidiary. It is expected that this change will serve a beneficial clarification for tax planning purposes.
iii. Foreign Currency Gains
When REITs hold foreign real or immovable property, they may finance the acquisition of such property using debt denominated in a foreign currency. Given the potential foreign currency risk in holding foreign assets, REITs may choose to enter arrangements in an effort to hedge that risk. To that effect, the proposed amendments will allow REITs to earn, as qualifying revenue, gains realized from foreign currency fluctuations in respect of revenues derived from foreign real or immovable property, exposing investors to additional revenue sources.
While the final form of these proposed amendments remains to be seen, collectively they appear to improve the attractiveness of real estate investment trusts for those looking beyond securities. By providing both clarification and improved qualification thresholds, the amendments modify the rules governing REITs in a manner that better reflects the practical realities within which these investment vehicles operate.
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Posted by: Dan Statlander | May 24, 2011 1:23:47 PM
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Posted by: MH | Jun 7, 2011 5:55:58 PM
Great information on the real estate investment is being shared here. It's really nice to read this info, and it would be helpful to know the legal options too.
Posted by: Jeff Morris (Real Estate Agent) | Jul 18, 2011 5:01:49 PM
It can be really remarkable when you can hear from people what really are the things the government should handle. Naturally, they must be dealing with the financial state with the country since it's probably the most critical thing.
Posted by: John Hoots – expert in realty mortgage Chicago | Jul 29, 2011 8:33:09 AM
Foreign property can really be finance using through debts.
Posted by: Jeff Morris (Real Estate Agent) | Aug 4, 2011 4:16:29 PM
If revenue is defined as gross inclusive of capital gains what is the capital gains rate and how is it defined?
Posted by: Andrew | Aug 13, 2011 4:00:02 PM
REIT's has so much do in Canada and then such leagally valuable amendments will done! this was surely helpful and knowledgeable to know. Many Thanks.
Posted by: Legal Service- Real Estate Property | Sep 20, 2011 4:07:29 AM
Is it correct to say that a REIT could not purchase all the shares of a Canadian corporation the only assets of which are Canadian rental properties because the shares of that corporation would not be qualified REIT property? Thank you.
Posted by: Mark | Sep 30, 2011 8:04:28 PM
I am very glad to read effective or informative knowledge about Real Estate Investment Trust of Canadian.
Posted by: Rostlin | Dec 22, 2011 5:13:33 AM
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Posted by: Lindsay | Jan 24, 2012 12:06:25 PM
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