Everything is on the Table in Tax Time Review…
REITs are an attractive way to look at real estate and to derive your cash flow from real estate – a big driver for the vast majority of investors with REITs is the tax strategy or rather the exemption they currently enjoy. They give you the shareholder 90% of their profits and you pay the taxes – without this tax burden, their yields look larger relative to other publicly listed corporations who distribute after tax monies to the shareholder and then you pay taxes again although at a lower marginal rate.
A regular and timely review of the tax code, citizen’s and investor’s charter of rights and the spirit and philosophy of taxation is a good thing. Change for the sake of change or simply to appear to have blocked an exemption from income taxes could well create some very real unintended consequences which would really hurt the real estate industry and take away any incentive investors currently have to put money into REITs. This would hurt all and benefit none.
“Since they were established in 1960, REITs haven’t had to pay corporate taxes on their income as long as at least 90% of their taxable income is paid as dividends. The tax savings from this exemption, which have allowed them to pay more in dividends, has been one of their main selling points.
Industry officials and analysts say it is unlikely that REITs will lose their tax exemption because it doesn’t result in a major loss of revenue to the Treasury. They point out that REIT dividends are taxed at a higher rate than other corporate dividends, 39.6% versus 20%.
REITs paid $29 billion in dividends to shareholders in 2012, according to the National Association of Real Estate Investment Trusts. If the 195 REITs lost the tax exemption and dividends were taxed at the same lower rate as other corporations, the amount gained would largely be offset by the amount lost from the lower tax rate on dividends, industry officials say.
Industry officials also note that the first REITs were established to give individuals an easy way to invest in income-producing real estate. If they lost their tax exemption, they would likely pay lower dividends and act more like other companies. “REITs are a creation of the tax code, so it’s no surprise that all parts of the tax code would subject to a review,” said Tony Edwards, general counsel of Nareit.” (Wall Street Journal, A.D.Pruitt April 2013)
More private REITs should be encouraged in Canada, with the appropriate policies, small investors can come together uniting their dollars and skills to build better communities.
To move the economy, government should consider allowing people to create and build new more efficient structures – using new technology and greener building approaches. This is expensive and therefore there should be a different approach to the taxation in this area. More levels and more marginal rates should be considered and added to the code to differentiate different activities. Yes it may complicate things a bit more, but using a good accountant with a degree of competence in tax and tax strategy will also help your investments and businesses.
Increase the percentages for depreciation (CCA), altering and allowing more capital gains on newer projects built say after 2013/14 would also inspire the creative juices of the small investor – business category [ say under the ten million dollar capital range].
The infrastructure spending which is required for any new project should spread the burden over a longer amortization and this should be picked up by provincial and local government (they should control it, own it and yes pay for it).
New policies should be introduced that inspire and motivate, not policies that penalize spending money for the betterment of our communities and employment of our citizens.
These policies should also inspire the upgrading of our current inventory of buildings with upgrades of electrical systems, heating systems, windows and doors, etc… in commercial buildings. This could even be funded with borrowed money from local government with a modest interest rate and yes with a lien on the property until paid off, conveniently added to your local property tax bill (because the city is so efficient in this area of taxing and billing).
These improvements to the property should not be immediately assessed and taxed via MPAC, there should be an exemption say for a period of five years.
These upgrades should target Canadian made products so that our manufacturing sector gets a helping hand along the way again a part of the exemption from the improvement tax.
There are many things we could do better and work from a vantage point of motivating, inspiring and incentivizing our small business sector and investors to succeed and hire just one more person to learn the craft of the businesses in the community – keeping it local.
Focusing on the positive, helps all succeed.
Envoy Capitol Realty Inc., Brokerage would like to help you get inspired with real estate, developments , investing and managing it all. We can help you start and build your own real estate portfolio and set up your management systems. Contact us for an initial meeting to review and discuss your real estate goals.
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Toronto , Ontario Canada
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