Established in 1993, Canadian
REITs have proven to be profitable for investors nation-wide and the economy as
a whole. Thanks to REITs, individuals can participate in the ownership of
commercial properties and reap the benefits of stability, growth, and
diversification that institutional and high net worth investors have enjoyed
for decades. REITs are taking their place alongside real estate development
companies globally as a desirable passive vehicle for holding stable income
producing real estate and distributing those funds to income oriented investors.
Although REITs have been consistently
growing, technical issues remain unresolved, and truly act as a hindrance to
this emerging sector.
REALpac believes that until
these outstanding technical issues are resolved; Canadian REITs will be
disadvantaged compared to their U.S., Australian and other global counterparts:
Outstanding Technical Issues:
It is not clear whether mortgages
being held by a REIT (which risks the REIT being considered as carrying on a
business, in which case the mortgages will constitute non-portfolio property)
is permitted. It needs to be allowed at least on a limited basis, as many REITs
need the flexibility of granting vendor take back mortgages on a sale, or
granting mezzanine loans to a developer to obtain an option on future developed
income producing properties.
Account Properties: Properties held
as inventory, where a REIT develops and has to sell off in the process a parcel
or parcels of property upon the completion of a retail development, may dis-entitle the entity to REIT status even if the initial intention was to
develop the property as capital properties of the trust. Incidental de
minimus sales should be permitted.
Areas: It is not clear when parking
areas will be considered ancillary to an income producing property and
therefore "good” assets. There are so many possible combination's of underground
vs adjacent parking lots, owner operated vs third party managed, and tenant use
vs. mixed use. REIT managements need more guidance and clarity in the
Trust on Trust Structure: We appreciate that the legislation has proposed to fix
the trust on trust structuring issue for "rent from real or immovable
properties”. However, the legislative fix is incomplete. The legislation
clarifies that "rent” paid to a trust and distributed as income is derived from
real property. However, interest and capital gains from the disposition of real
property – "good” income under the REIT revenue tests – do not retain their
source when earned by a subsidiary trust and distributed to the beneficiary.
This may be a problem for a subsidiary entity which holds substantial mortgages
receivable or has realized a substantial gain on the disposition of real
property. A "consolidated” test may solve this problem, or a specific
Limited Partnership Issue: A
partnership contained in a REIT could be subject to specified investment
flow-through (SIFT) tax. It further appears that SIFT tax could be applied at
the trust level and the partnership level. A SIFT partnership is also unable to
qualify for the REIT exemption. There appears to be no exclusion where one of
the other partners in a limited partnership is an individual, a tax exempt
entity, a non-resident trust or a trust that is not a SIFT or a REIT.
Curative Provisions: Unlike U.S. REIT
legislation, there are no curative provisions apparent in the legislation to a
REIT that has accidentally breached the SIFT rules. A softer regime for
temporary and unintended breaches needs to be available.
No De Minimus NPP: There are no apparent provisions to allow ownership of
de minimus (e.g., less than 5%) non-portfolio property. This should be enacted
to avoid a minor acquisition mistake from tainting the entire REIT.
Previous Government Submissions
Proposed Amendments to the Real Estate Investment Trust Rules: Minister of Finance Jim Flaherty
Canada's Economic Action Plan: Pre-Budget 2011 Consultation
Letter to the Ministry of Finance re: European Parliament and Council
Directive on Alternative Investment Fund Managers (AIFMs) and the
amendment of Directives 2004/39/EC and 2009/…/EC
"Consultation Submission on Canada's Retirement Income System:
Recognizing Real Estate Investment Trusts (REITs) as a Valuable Part of
Senior's Retirement Income", Department of Finance
REIT Submission to Ministry of Finance
"REIT Ancillary Issues" document submitted to the Minister of Canada Revenue Agency's office
"REIT Rules: Letter to the Minister of Finance"Sent to Federal Finance Minster
For more information on this issue, or any of REALpac's government relations initiatives, please contact Ryan J. Eickmeier, Manager, Government Relations & Policy at (416) 642-2700 x.224.