How is REIT income taxed in Canada?
REITs offer certain tax advantages to encourage this investment. In Canada, a REIT is not taxed on income and gains from its property rental business. Instead, shareholders are taxed on a REIT's property income when it is distributed, and some investors may be exempt from tax.
Are REIT dividends subject to the maximum tax rate? The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income.
Regular Income.
REITs in Canada generally offer attractive yields, and most pay regular monthly dividends.
Avoiding REIT dividend taxation
If you own REITs in an IRA, you won't have to worry about dividend taxes each year, nor will you have to pay taxes in the year in which you sell a REIT at a profit. In a traditional IRA, you won't owe any taxes until you withdraw money from the account.
Investing in REITs through your TFSA can help you diversify your investment portfolio while generating passive income. A private REIT can be a savvy choice if you are looking for a tax-efficient way to increase your fixed income.
Unlike many companies however, REIT incomes are not taxed at the corporate level. That means REITs avoid the dreaded “double-taxation” of corporate tax and personal income tax. Instead, REITs are sheltered from corporate taxes so their investors are only taxed once.
Generally, a REIT must file its income tax return by the 15th day of the 4th month after the end of its tax year.
When you receive the net income from the REIT as distribution, the amount received would be added to your personal tax return and it is taxed at your marginal tax rate. If you invest in the REITs using registered accounts such as TFSA and RRSP, there's no tax implication.
By default, all dividends distributed by a REIT are considered ordinary, or non-qualified, and are taxed as ordinary income. REIT dividends can be qualified if they meet certain IRS requirements.
Reinvesting REIT dividends can help retirement savers grow their portfolio's investment, and historically steady REIT dividend income can help retirees meet their living expenses.
Is it OK to hold REITs in a taxable account?
This makes them a great type of dividend investment to hold in tax-advantaged retirement accounts like traditional IRAs, Roth IRAs, and 401(k)s. In this scenario, you wouldn't need to keep track of the cost basis from ROC. It's also okay to own REITs in taxable accounts.
Individuals can currently deduct 20% of the pass-through income coming from REIT investments. This can incentivize you to invest in a REIT right now as you may pay significantly less in taxes than you would have before this benefit was provided. There is no guarantee that this tax benefit will be extended beyond 2025.
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
REITs are a Potent Source for Retirement Income
On average, 70% of the annual dividends paid by REITs qualify as ordinary taxable income, 15% qualify as return of capital, and 16% qualify as long-term capital gains. Most income distributed from REITs is taxed as ordinary income rather than as dividend income.
Investing in REITs in Canada
The easiest way for investors to add REITs to their investment portfolio is to purchase a REIT ETF through their discount brokerage account. The top REIT ETFs in Canada are BMO's ZRE, Vanguard's VRE and iShares' XRE.
Is a Roth or traditional IRA the best choice? To be clear, retirement accounts are ideal places to hold REIT investments, as the benefits of tax-deferred investing can magnify the already tax-advantaged nature of these companies.
A company that qualifies as a REIT is allowed to deduct from its corporate taxable income all of the dividends that it pays out to its shareholders. Because of this special tax treatment, most REITs pay out at least 100 percent of their taxable income to their shareholders and, therefore, owe no corporate tax.
Even with a challenging market, REITs are considered a staple for many investment portfolios thanks to the 90% rule. As the name implies, this rule stipulates that real estate trusts must distribute 90% of their taxable earnings to existing shareholders.
Benefits of investing in REITs include tax advantages, tangibility of assets, and relative liquidity compared to owning physical properties. Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
Five or fewer shareholders can't control more than 50% of the stock. Must pass annual income and quarterly asset tests, and. Must distribute 90% of its REIT taxable income each year.
What is the gross income test for REITs?
In order to meet the 75% test, at least 75% of a REIT's gross income must be derived from the following: Rents from real property. Interest on obligations secured by mortgages on real property or on interests in real property. Gain from the sale or other disposition of real property.
Reporting REIT Dividends
Any ordinary dividends you receive from a REIT are reported to you and the IRS on Form 1099-DIV. The dividends will be included in Box 1 of Form 1099-DIV. You must then report these ordinary REIT dividends as ordinary income on your personal income tax return.
AMT starts when the dividends reach $55,002 (2022 $54,403). Federal AMT is applicable for dividends above this amount, until the amount of the dividends reaches $175,218 (2022 $161,215), when the regular federal tax equals or exceeds the minimum amount.
To qualify as a REIT, a trust needs to be a publicly traded unit trust that is resident in Canada and must meet tests set out in the Income Tax Act (Canada) (the “ITA”) based on, among other factors, the nature and quantity of real estate assets owned and the sources of trust revenue.
Though REITs have existed in the US since the 1960s, they have only been available in Canada since 1993. Most REITs work on a straightforward equity model. By leasing space and collecting rents, the company generates income from its real estate holdings. That income is then paid out to shareholders as distributions.
