Real Estate investment trust
Does anyone know how REITs are taxed in Canada and where it is reported on income taxes?
REIT (or trust) cash distributions are made up of several different types of income, which are reported in different places and can be different each year.
Looking at the following link for RioCan's 2011 distributions as an example:
Per unit, $1.38 was paid.
Of this amount, the following types are reported:
Other Income 31.24 % is other income (or about $0.43) - this will be reported as income on the tax return.
Capital Gains 1.27% (or about $0.01) - this will be reported as a capital gain (CG).
Foreign Non Business Income 4.57% (or about $0.06) - reported as foreign income.
Reduction in Adjusted Cost Base [ usually called Return of Capital (RoC)] 62.47% (or about $0.86). This reduces the ACB and is the most complicated part.
Where the most recent re-calculation of the ACB is zero or positive, nothing else needs to be done until the REIT is sold. When sold, the ACB is re-calculated for any additional RoC and is then used to calculate the capital gain (or capital loss) from the sale.
If the updated ACB is negative, the RoC portion of the cash payments going forward is reported as a capital gain (in addition to the CG listed above) until the RoC becomes positive by something like buying more units.
The good news is that except for the ROC - the broker will report all of this to you.
You should receive one or more T3 forms (some trusts or REITs are slow to report so you might end up with a T3 in say March for the early reporting Trusts and another T4 in April for the slower reporting REITs) plus a T3 summary report that lists which REIT paid how many payments, including the types paid. The summary lets you check the totals on the T3 form.
Just attach the T3 and put the amounts from the required boxes in the proper places on the tax return. For example, Capital Gains (box 21) is reported as a CG and Other Income (box 26) is reported as income and so on.
For RoC, re-calculate the ACB is to make sure it is still positive (usually the case).
Finally, when the REIT or trust is sold - the RoC for any remaining payments is used to re-calculate the ACB. Then just like any other stock sale, the ACB is used on Schedule 3 to determine if the sale resulted in a Capital Gain or Capital Loss.
I know this is a lot of information but if you are familiar with a dividend paying stock, then think of it as the dividend paying stock is the simple case and the REIT (or trust) is the more complicated case. At the end of the day, report each year what is taxable for that year and when the investment is sold, report the CG (or CL) from the sale.