# REITs and LP tax impact in TFSA or RRSP accounts



## besmartrich (Jan 11, 2015)

*Two questions*

*1.REITs*

Correct me if I am wrong, based on my understanding, REITs are not taxed at company level and they are required to distribute very high percentage (is it 90%?) of their profits to the shareholders and shareholders pay taxes on it. However if you hold REITs in RRSP or TFSA accounts then you don't pay any taxes.

That got me thinking the following.
If you are investing in let's say Rogers. It is a corporation and it pays income taxes to Gov. 

Let's assume it made $100 and pay $30 of corp tax to Gov. Rogers keeps $70 and distribute dividend to shareholders and used the rest for general business purposes for shareholders. So the net benefit to shareholders is $70 assuming you are holding it in RRSP or TFSA. 

The same example but use a REIT, Dream office. Let's assume Dream office REIT made $100 but doesn't pay income taxes to Gov and distribute the most of them. Let's say Dream office distributes $90 to the shareholders as dividend who pays taxes and use $10 for general business purposes for shareholders. However if you hold it in RRSP or TFSA, then you don't pay any taxes. Net benefit to shareholders is $100.

Does it mean, if you want to maximize your net investment return, would holding REITs in RRSP or TFSA the best deal from a tax perspective? (assuming Rogers and Dream office performs exactly the same) I may have over-simplified things here but if you can provide any insights on this, that will be great!

*2. Limited partnership *

I invested ARLP (US) in RRSP thinking that dividend from it would not be taxed due to US-Canada tax treaty. However dividend that I received was taxed (at 40%) as withholding taxes are not exempted when distributed to Canadian shareholders in RRSP. I know that LP isn't taxed at corp level. Thus all of (or most of )profits will have to be shared to the partners (shareholders) who pay taxes right? Just double checking. Is there anyway we can get the witholding taxes exempted if we hold it in RRSP? I don't know anyone would have answers to this but just in case.

Thanks in advance!


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## Woz (Sep 5, 2013)

*1.REITs* 
US REITs are required to distribute 90% of their income, but I don’t believe Canadian REITs have that same/any distribution requirement.

In your example, yes, I’d say REITs in a registered account are probably more efficient from an overall tax perspective. However, corporations can also defer taxes by reinvesting earnings into the corporation, so it's not always a big difference (depends on the dividend payout ratio).

*2.Limited Partnership*
US MLPs have a withholding tax at the highest US federal rate (39.6%). The income is considered business income, so it’s not covered by the US-Canada tax treaty. There’s no easy way around that in your RRSP, and is a big reason MLPs aren’t great to hold in an RRSP, assuming you have other unregistered investments you could replace them with and/or have a marginal tax rate below 40%. Outside an RRSP you’d be able to recover the tax through a foreign tax credit.

There is one technique you could work to potentially avoid the tax in the RRSP, but it’s not really guaranteed to work and it’s possible you’d get a drag on returns. Basically you convert your dividends to capital gains by selling your shares the day before every ex-dividend date and buying them back the day after the ex-dividend date. By selling the shares before the date you don’t receive the dividend. The day after the ex-dividend date the shares should drop by the dividend amount so you can rebuy the shares more cheaply. There can be a lot of volatility around the dividend date though so not being invested for that day isn’t always ideal. You also end up with more trading fees.


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## Eclectic12 (Oct 20, 2010)

Why are you focusing on a type of investment?

REIT, eligible dividend paying or GIC ... it is all Canadian tax free. Last I checked, zero $$$ Canadian taxes usually is the best choice. The exception I can think of is where eligible dividends are the only source of income so that the first $50K won't have income tax (but may get into OAS clawback territory) might work better.


For REITs in particular "max net return" is a YMMV situation IMO. Rio-Can that has a high payout of regular income (50%+ on a consistent basis) is better in the registered account. Something like Chartwell Retirement REIT that pays between 75% to 100% as RoC (which is tax deferred where the ACB is positive but could be a yearly CG to report) I'd say is better in a taxable account.

Where the priority is to avoid the bookkeeping that comes with an investment that pays mixed income types (REITs, ETFs, MFs), regardless of tax implications - some will choose the registered account to drop this requirements.


As for US investments ... then the US NR taxes come into play where the 30% rate for dividends/income gets dropped to 15% for Canadian but still exists in a TFSA. In an RRSP, for holding the stock directly, the US 15% withholding is exempt. LPs get different treatment so like this is better in a taxable account where one gets the FTC as well as the choice of filing a US tax return to get a bit of a refund. I have not investigated what happens to the US LP in an RRSP.


Cheers


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## Eclectic12 (Oct 20, 2010)

besmartrich said:


> ... That got me thinking the following.
> If you are investing in let's say Rogers. It is a corporation and it pays income taxes to Gov.
> 
> Let's assume it made $100 and pay $30 of corp tax to Gov. Rogers keeps $70 and distribute dividend to shareholders and used the rest for general business purposes for shareholders. So the net benefit to shareholders is $70 assuming you are holding it in RRSP or TFSA.


This is a partial analysis ... holding Rogers in a TFSA means the CG from the shares are also Canadian tax free. In an RRSP, it is true that when withdrawn it will be reported as income but the trade off is that any sales in the RRSP do not whittle off the CG. So $1 gain is a full $1 to re-deploy in the registered account compared a smaller amount after the CG tax is paid.

The REIT analysis is similarly incomplete.


In both cases, the "down" side to having these investments in a TFSA is that the DTC is lost as there is no Canadian tax to pay.
So in an RRSP ... yes there would be the full $100 of the REIT payment but that $100 on withdrawal will be taxed at the same rate as employment income.


Cheers


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## besmartrich (Jan 11, 2015)

Woz said:


> *1.REITs*
> US REITs are required to distribute 90% of their income, but I don’t believe Canadian REITs have that same/any distribution requirement.
> 
> In your example, yes, I’d say REITs in a registered account are probably more efficient from an overall tax perspective. However, corporations can also defer taxes by reinvesting earnings into the corporation, so it's not always a big difference (depends on the dividend payout ratio).
> ...


Thank you so much for insights on this. I did not realize Canadian REITs have the similar 90% distribution requirement that US has.

And that selling and buying technique to avoid withholding taxes on ex-dividend date with regards to US MLPs is technically brilliant. Great job coming up with the idea. I am very impressed.


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## besmartrich (Jan 11, 2015)

Eclectic12 said:


> This is a partial analysis ... holding Rogers in a TFSA means the CG from the shares are also Canadian tax free. In an RRSP, it is true that when withdrawn it will be reported as income but the trade off is that any sales in the RRSP do not whittle off the CG. So $1 gain is a full $1 to re-deploy in the registered account compared a smaller amount after the CG tax is paid.
> 
> The REIT analysis is similarly incomplete.
> 
> ...


Thanks for this, Eclectic12. Much appreciated!


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## Eclectic12 (Oct 20, 2010)

besmartrich said:


> ... And that selling and buying technique to avoid withholding taxes on ex-dividend date with regards to US MLPs is technically brilliant. Great job coming up with the idea. I am very impressed.


Is it though?

For each dividend there is going to be a sell/buy commission. Then too, the investment will debut minus the dividend correctly but if one's order doesn't get filled at or lower than the sell price, one may lose far more than the dividend *just* on the revised buy price ... never mind the additional commissions.


Theoretically ... it might be nice but for the retail investor who isn't sitting in from a trading platform all day ... is it really worth the work and risk?

Looking at the Nov dividend paid, buying after the dividend meant paying much more than the close price minus the dividend. I haven't looked at the rest of them but AFAICT, there is nothing that says the price will automagically return to something favourable to the investor that sold to avoid the dividend.


Cheers


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## Woz (Sep 5, 2013)

Eclectic12 said:


> Looking at the Nov dividend paid, buying after the dividend meant paying much more than the close price minus the dividend. I haven't looked at the rest of them but AFAICT, there is nothing that says the price will automagically return to something favourable to the investor that sold to avoid the dividend.Cheers


There are times it wouldn't work out. You're open to the market volatility overnight. That Nov. dividend is an example of where it worked perfectly though. It closed at $21.66 on Nov 3rd (pre ex-div) and opened at $20.99 (ex-div). That's a $0.67 drop in stock price after paying out $0.675 in dividends.
By using that strategy you would've increased your after tax return by 1.21% on the November distribution.


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## besmartrich (Jan 11, 2015)

Eclectic12 said:


> Is it though?
> 
> For each dividend there is going to be a sell/buy commission. Then too, the investment will debut minus the dividend correctly but if one's order doesn't get filled at or lower than the sell price, one may lose far more than the dividend *just* on the revised buy price ... never mind the additional commissions.
> 
> ...


Haha I know what you mean, What Woz said was technically smart idea although I would not use the strategy at all to bypass withholding taxes due to many reasons you and Woz mentioned.


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## junior minor (Jun 5, 2019)

All right, this isn't a new conversation, yet I'm in the market for those and looking forward to (l)earn. If I got this correctly, the US & Canada Tax treaty can apply in some situations and we can benefit from some kind of credit?

I'm also inquiring regarding the dividend ''skipping'', as in buying the stock after selling right before&after the ex div date.It's true that transaction fee can be risen, although with apps,these days, it can be forgotten.

I also read that Industrial REIT(what got me looking into this thread) are now a market with lots of potential, because, well, online purchase are just going through the roof now.

Here's a nice ''financialpost'' article that tells of interesting options. I have yet to figure if one can incorporate separately just to do this as a hobby and still end up scot-free.








You can earn $50K in tax-free dividends, but there's a catch: You can't have a job


Jonathan Chevreau: While early retirement may be a pipe dream for most, some do pull it off and live almost tax-free on dividend income alone. Here's how




financialpost.com




.




Woz said:


> US MLPs have a withholding tax at the highest US federal rate (39.6%). The income is considered business income, so it’s not covered by the US-Canada tax treaty. There’s no easy way around that in your RRSP, and is a big reason MLPs aren’t great to hold in an RRSP, assuming you have other unregistered investments you could replace them with and/or have a marginal tax rate below 40%. Outside an RRSP you’d be able to recover the tax through a foreign tax credit.
> 
> There is one technique you could work to potentially avoid the tax in the RRSP, but it’s not really guaranteed to work and it’s possible you’d get a drag on returns. Basically you convert your dividends to capital gains by selling your shares the day before every ex-dividend date and buying them back the day after the ex-dividend date. By selling the shares before the date you don’t receive the dividend. The day after the ex-dividend date the shares should drop by the dividend amount so you can rebuy the shares more cheaply. There can be a lot of volatility around the dividend date though so not being invested for that day isn’t always ideal. You also end up with more trading fees.


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## Eclectic12 (Oct 20, 2010)

Whether the Canada-US tax treaty provides benefits depends on whether the income paid is classed by the source country's tax law as being the same thing as what's covered in the treaty.

McDonald's common stock paying what matches the IRS's definition of dividends means the dividends section of the tax treaty comes into play. The benefits are:
a) taxable account - reduction from 30% to 15% WHT
b) rrsp or rrif - exemption from the 30% WHT
c) tfsa - reduction to 15% WHT but the Canadian FTC will not apply as there is no Canadian tax.


MLPs have been determined to be business related (I forget the term) and there's nothing in the tax treaty to help with business related income. This means full US WHT.


Re: Incorporate to be invest as a hobby 
I doubt this will work as IIRC, too much income from financial transactions/trading means losing the small business tax credit. I haven't looked into any differences between a business that invests versus a business that was setup to invest.








Investing personally or in a corporation | Advisor's Edge


How passive income rules factor in to the decision




www.advisor.ca





Cheers


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