Income Trusts and REIT

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kukuji
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Income Trusts and REIT

Post by kukuji »

Should Income Trusts and REIT's be held inside or outside registered accounts (RRSP, TFSA etc) ?

I am currently 64 years old, retired and have enough income in that I do not have to withdraw from RSP until converted to RIF.
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patriot1
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Re: Income Trusts and REIT

Post by patriot1 »

It's my understanding that all trusts except REIT's have to convert to a corporate taxation structure by the end of this year.

Such trusts definitely should be held outside a registered account, so you can get the dividend tax credit.

REIT's will still distribute pre-tax income, so you're not losing the DTC by keeping them in a registered account. But some of them distribute non-taxable cash flow (ROC) which means you might want to hold them outside a registered account as well.
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Re: Income Trusts and REIT

Post by MaxFax »

Securities are always better held behind tax-shelter walls when they are producing income that triggers tax.

Income trusts and REITs issue distributions that are made up of a variety of tax-types of income. You have to go to their own website to see their particular distribution types. Both trusts and REITS generally distribute a great deal of income that is fully taxable. (That is the whole point of their existence). This type of fully-taxed income is a high priority for hiding behind RRSPs.

At this late date before the conversion of trusts to corps, it is probably not worth making any decision on their current distribution tax-type. Better leave them where they are and see what happens to their level of distribution. It will become dividend income after the conversion.

The advice given above presumes that you are at the lower marginal tax rates. At lower tax rates the dividend tax credit is larger than the tax it triggers for a net negative tax. So for those people dividends are better held outside RRSPs. But for people at higher tax brackets this is not the case. There is a net positive tax assessment on the income, so the security is better off inside an RRSP. Do a quick and dirty estimate of your tax bracket at the input box on this spreadsheet to see which situation you are in.

I am presuming that you are not concerned here with trying to melt-down your RRSP.
kukuji
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Re: Income Trusts and REIT

Post by kukuji »

Thank you Maxfax for the words of wisdom. The spread sheet is very informative.
tedster
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Re: Income Trusts and REIT

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I have done well with some income trusts in my TFSA. However, a couple of them have just announced a conversion. This will mean, I believe that I should be thinking of selling them or transferring them out (can I do that?) with stocks that ddo not delcare dividends or distributions? Do I have this right?
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ThinkDividends
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Re: Income Trusts and REIT

Post by ThinkDividends »

patriot1 wrote:It's my understanding that all trusts except REIT's have to convert to a corporate taxation structure by the end of this year.
No they don't. They all have to pay tax. It is expensive to convert (lawyers ...). Inter Pipeline (IPL) and Brookfield Renewable Power are not converting before 2011.

Dividend Tax Credit does not mean Tax Free

Holding REITs in a TFSA is a good idea.
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MaxFax
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Re: Income Trusts and REIT

Post by MaxFax »

tedster wrote:I should be selling them or transferring them out ?
You are mis-hearing the advice about tax-optimization. Your first decision is what investments you want to own because you think they will earn you the highest return (for accepable risk). Yes in theory you make that estimate of return on an after-tax basis, but in practise the estimate is rough enough that the tax effects won't change the decision.

THEN you decide in what type of account they are best held. You sort your different holdings by the amount $$ of tax they are likely to attract. You put behind the RRSP and TFSA walls the assets that attract the highest $$ tax ($rate of return multiplied by the marginal tax %rate that will be applied to that kind of security).

In your case it sounds like you don't hold any other securities outside (in taxable accounts), so there is no prioritizing to be done. Keep them behind the tax shelters. The only wrinkle to that advice concerns dividend income from Canadian companies. You have to find out what type of distributions your holdings will be paying. The advice you may have been hearing probably presumes that you are at the lower marginal tax rates. At lower tax rates the dividend tax credit is larger than the tax it triggers for a net negative tax. So for those people dividends are better held outside RRSPs/TFSAs. But for people at higher tax brackets this is not the case. There is a net positive tax assessment on the income, so the security is better off inside an RRSP/TFSAs Do a quick and dirty estimate of your tax bracket at the input box on this spreadsheet to see which situation you are in.
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Re: Income Trusts and REIT

Post by tedster »

MaxFax wrote
The only wrinkle to that advice concerns dividend income from Canadian companies. You have to find out what type of distributions your holdings will be paying. The advice you may have been hearing probably presumes that you are at the lower marginal tax rates. At lower tax rates the dividend tax credit is larger than the tax it triggers for a net negative tax. So for those people dividends are better held outside RRSPs/TFSAs. But for people at higher tax brackets this is not the case.
In my case I have these Income Trusts which on their own are performing very well. They have stated that they will convert from IT and the distributions will be reduced, but after dividend credit the result should be the same for the holders of the securities. I am.. I suppose in the mid-range of tax rates. I assumed that if the distribution is paid in a Tax Free account, there will be no dividend credit. Hence my question.
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Re: Income Trusts and REIT

Post by MaxFax »

Sorry but you have to do the steps I explained yourself. We cannot do it for you because we don't know the specifics.
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Re: Income Trusts and REIT

Post by Springbok »

tedster wrote:
In my case I have these Income Trusts which on their own are performing very well. They have stated that they will convert from IT and the distributions will be reduced, but after dividend credit the result should be the same for the holders of the securities. I am.. I suppose in the mid-range of tax rates. I assumed that if the distribution is paid in a Tax Free account, there will be no dividend credit. Hence my question.
Seems to me that securities that would otherwise attract tax should be in a TFSA (or RRSP/RRIF). For those in a tax bracket where dividends attract a lower tax rate, dividend payers should be in taxable account. Otherwise you won't get the DTC.

Some trusts and most REITS pay part of their income as ROC, so depending on the amount of ROC, they may also be better in the taxable account. But, some REITs (and trusts that won't convert) have high "other income" which will be fully taxed - best to be sheltered. Each one needs to be looked at based on make-up of distribution.

I sometimes use last year's tax program and try moving investment income types around to see affect on overall tax. Easy enough to do.
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Re: Income Trusts and REIT

Post by AltaRed »

Springbok wrote:I sometimes use last year's tax program and try moving investment income types around to see affect on overall tax. Easy enough to do.
Excellent concept to do 'what ifs' with if Tedster does that. But if he uses a tax accountant, the next best thing is an online tax calculator to do 'what if' analysis.

Tedster needs to look at what, for example, $1000 of Other Income in a non-registered account does to his bottomline tax paid versus $1000 of eligible dividends and see whether the swap out of his TFSA is worth it. As a 'middle income' tax payer, using Tedster's words, I suspect there is nothing to be gained by strictly a withdrawal. Unless his income is low enough to result in a negative dividend tax rate, keeping income sheltered is a 'no brainer'.
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tedster
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Re: Income Trusts and REIT

Post by tedster »

I am pondering all of this. :oops:
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Arby
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Re: Income Trusts and REIT

Post by Arby »

kukuji wrote:Should Income Trusts and REIT's be held inside or outside registered accounts (RRSP, TFSA etc) ?
A recent issue of CIBC's REIT Monthly report includes an interesting discussion about the tax efficiency of REIT distributions. The report notes that the ROC portion of a REIT's distribution will decrease over the time as the tax basis of its properties is depreciated over time. This means that as a REIT gets older, generally the tax efficiency of the distributions will erode until 100% of the REIT’s distributions become taxable, and no return of capital is included. This situation has already occured for some of the older REITs such as Riocan and CREIT, which currently include almost zero ROC in their distributions. On the other hand, some newer REITs with large undepreciated tax basis on their properties have 100% ROC in their distributions.

This issue becomes important when investors consider whether to hold a particular REIT in a taxable or non taxable Registered acount (RRSP, TSFA, RESP). There is no blanket answer for REITs. Investors should look at the breakdown of the distributions when determining which REITs are better held in Registered accounts and which REITs are better held in taxable accounts.
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