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Reit taxation
August 10, 2020
7:28 pm
Bud
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Smartcentre distribution mostly income but about 9% is ok for non registered account?

December 13, 2020
7:12 pm
Bud
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Do you agree with Heinzl he claims better to invest Reit inside rrsp or rrif?

https://www.google.com/amp/s/www.theglobeandmail.com/amp/globe-investor/investor-education/can-you-spot-the-flaw-in-this-rrsp-analysis/article23791415/

Any opinions on reit structure as an investment vehicle

December 15, 2020
6:07 pm
beta2020
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I always thought you held REITs in a registered account because the dividends are mostly non-eligible dividends, and therefore treated as regular income in a taxable account.

In terms of what to hold in your taxable account, if your registered accounts are filled then Canadian stocks that return capital in the form of eligible dividends are the best bet - although your portfolio will end up being not very diversified.

December 15, 2020
6:28 pm
Norman1
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That nature of the gains doesn't matter.

As Heinzl explains, when the tax rate, including any OAS clawbacks, is the same as the tax rate when the RRSP contribution were deducted, there is no net taxes paid and the RRSP is equivalent to a TFSA.

In such cases, it is better to put stocks in an RRSP because one is shielding 5% to 7% returns from dividends and capital gains from income taxes instead of shielding the 1% to 3% interest from bonds/GIC's.

This was explored earlier. Department of Finance was kind of enough to point that out when TFSA's were introduced.

December 15, 2020
7:46 pm
Bud
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so ur sayin after tax rrsp or rrif becomes like tfsa so use tfsa for stocks or rsp.

what if one has capital losses to offset gains

also if stock pays no dividend

and if ur investing above registered limits i guess non-reg is only choice? holding co.

December 16, 2020
4:34 pm
Norman1
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Bud said
so ur sayin after tax rrsp or rrif becomes like tfsa so use tfsa for stocks or rsp.

That's not what Heinzl and I said. An RRSP or RRIF is the same as a TFSA when the tax rate (including clawbacks) on the withdrawals is the same as the tax rate on the RRSP deductions.

One needs to watch the tax rates involved.

Unused capital losses from other years don't matter if one isn't paying any taxes on the capital gains anyways.

December 16, 2020
6:50 pm
Bud
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Heinzl n other financial planners are not clear there's still doubt. U'll see the damage to ur worth one day when u have to start withdrawing from ur rrif its like a limb being cut off every year and its a bother to administrate year after year and move around from fi to fi. I guess if u put it all in funds n stocks ull get rich.

December 17, 2020
2:26 pm
Norman1
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Heinzl and others are as clear as they can be. That's because the answer depends on (1) the tax rates when the RRSP contributions were deducted and (2) the tax rates plus clawbacks when the withdrawals are taxed.

Heinzl's point is that if one had been getting 30% back from the RRSP deductions all those years and one is now paying 30% tax on the the RRSP/RRIF withdrawals now, then one is actually paying no net taxes.

No net taxes on the 70% of the contributions in the RRSP the government had not reimbursed through the RRSP contribution deduction. No net taxes on any of the interest, dividends, or capital gains that 70% of the contributions earned.

If one is looking for a simple answer, that one kind of registered account is better than the other with no conditions, then one won't find it.

December 17, 2020
3:24 pm
rhvic
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One characteristic about some REITs (and some ETFs for that matter) is that after a year of getting what look like nice distributions (say around 10% return) they often then redefine most of that as "Return of Capital" or ROC. For one of the REITs which I hold, it dropped the effective rate from 10% to about 1%. Yes, the ROC does reduce your cost base, but I did not buy these units just so they could slowly dribble my own money back to me. Not sure these are all a good investment.

December 17, 2020
5:45 pm
Bud
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rhvic hmm which one? at times a few of them seem to raise funds to pad distributions but not all right.

Any worthwhile?

December 17, 2020
5:50 pm
Norman1
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Distributions that are "return of capital" for tax purposes are not always a return of some of the original investment.

With a trust that doesn't have assets that it can claim depreciation for, like a vanilla equity mutual fund, the ROC distributions are indeed return of the investor's original investment.

With a trust that does have assets that it can claim depreciation for, like a REIT, the ROC distributions can be income that is shielded by claimed depreciation.

This is from The Navigator (RBC Wealth Management): Return of capital:

Mutual funds
ROC distributions typically occur when a fund’s objective is to pay a regular set monthly or annual distribution. If the fund earns income (i.e., interest, dividends and realized capital gains) that is less than the set distribution amount, ROC is used to make up the remainder of the distribution. This means some of the fund’s original capital is returned to you in order to cover the distribution.

REITs
A REIT is allowed certain tax deductions such as depreciation. These deductions result in a lower taxable income for the REIT but do not reduce the cash available for distributions. This permits the REIT to make cash distributions to you in excess of its [taxable] income. Any distribution in excess of the REIT’s [taxable] net income represents ROC.

December 18, 2020
7:01 am
Bud
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Selling pressure on some reits this past week any theories as to why are they under pressure to cut distributions they have to pay out almost everything right maybe now they have to hold some funds back. Both Riocan n Smartcentres rolled over their debentures this week at around 2%. Allied prop (office) is another under some pressure. Seems market is sayin somethin beyond lockdown. buy sell hold

December 18, 2020
9:27 am
rhvic
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Bud said
rhvic hmm which one? at times a few of them seem to raise funds to pad distributions but not all right.

Any worthwhile?  

I hold some SOT.UN which is Slate Office REIT.

I noticed that the distributions for 2019, for example, were $0.03330 per unit per month, or $0.3996 per year. Various sources (such as Globe and Mail website) thus report the distribution (or dividend) rate as 10.3% per annum at the time.

In April 2020, I received notice of a return of capital re SOT.UN, which worked out to $0.3527 per unit. No cash was deposited into my account by my broker re this amount, but I was informed that the return of capital does reduce my cost base.

Thus, it would seem to me that the actual 'earnings' on each unit is more like $0.047 per annum, which would equate to a more accurate distribution rate of 1.2% per annum - much less attractive!

For a fictitious example: One buys a REIT or ETF say for a total of $10,000. The distributions for the first year are say $1,000, or 10%. But then it is announced that $900 of that is ROC. Thus you are really earning only $100 (1000-900) on $9100 (10000-900), which is around 1.1%.

I am no longer seeing such investments as a good place to put my money.

December 18, 2020
11:05 am
savemoresaveoften
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rhvic said

I hold some SOT.UN which is Slate Office REIT.

I noticed that the distributions for 2019, for example, were $0.03330 per unit per month, or $0.3996 per year. Various sources (such as Globe and Mail website) thus report the distribution (or dividend) rate as 10.3% per annum at the time.

In April 2020, I received notice of a return of capital re SOT.UN, which worked out to $0.3527 per unit. No cash was deposited into my account by my broker re this amount, but I was informed that the return of capital does reduce my cost base.

Thus, it would seem to me that the actual 'earnings' on each unit is more like $0.047 per annum, which would equate to a more accurate distribution rate of 1.2% per annum - much less attractive!

For a fictitious example: One buys a REIT or ETF say for a total of $10,000. The distributions for the first year are say $1,000, or 10%. But then it is announced that $900 of that is ROC. Thus you are really earning only $100 (1000-900) on $9100 (10000-900), which is around 1.1%.

I am no longer seeing such investments as a good place to put my money.  

But to extend ur fictitious example, let says u sold it at the end of the first year at $10,000. You now have a $900 capital gain to report plus a $100 dividend income, ur return is still 10%. The reduced return of 1.1% is only true if the share price of the unit drops by the $900 which is the amount of ROC.

In general those REIT that has a high $ of return as ROC, you wont see much price appreciation. This just reminded me of one of the big 5 banks which used to post big ads in their branch of its monthly incomel fund which has a monthly yield much much higher than typical fixed income and dividend yield at the time. Amazed by this too good to be true return, I looked at the magic behind it. Turned out a good chunk of it is ROC and the mutual fund price just keeps dropping every year by that amount if not more. Yet the bank earn their 2% MER every year....It was finally shut down a few years afterwards with some journalists "pointed out" what really is going on.

December 18, 2020
3:03 pm
rhvic
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savemoresaveoften said

But to extend ur fictitious example, let says u sold it at the end of the first year at $10,000. You now have a $900 capital gain to report plus a $100 dividend income, ur return is still 10%. The reduced return of 1.1% is only true if the share price of the unit drops by the $900 which is the amount of ROC.

 I bought Slate in July 2013 at a then price of $8.85 per unit. With the adjustments to cost base over the years, my effective purchase price is now $6.31. The price today on the market is $4.22. My overall compound annual return at this price including distributions and ROC on this investment works out to +0.5% - rather poor indeed. Also I hold this in a registered account, so capital gains do not come into play.

December 18, 2020
3:11 pm
Norman1
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savemoresaveoften said

…. Amazed by this too good to be true return, I looked at the magic behind it. Turned out a good chunk of it is ROC and the mutual fund price just keeps dropping every year by that amount if not more. Yet the bank earn their 2% MER every year....It was finally shut down a few years afterwards with some journalists "pointed out" what really is going on.

That's a page out of the insurance agent playbook for selling what are called prescribed annuities.

Payout would be higher than GIC or bond rates. sf-smile Furthermore, payouts only partly taxable, unlike 100% taxable with bond interest! sf-smilesf-smile

Don't mention that part of each payout is return of some of the investor's principal. sf-surprisedConsequently, at maturity, the investor receives only what's left of the original principal that hasn't already been paid out. sf-frown

Clever way to make something that only earns 1% per year look like it was "earning" 3% per year.

December 18, 2020
3:47 pm
Norman1
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rhvic said

 I bought Slate in July 2013 at a then price of $8.85 per unit. With the adjustments to cost base over the years, my effective purchase price is now $6.31. The price today on the market is $4.22. My overall compound annual return at this price including distributions and ROC on this investment works out to +0.5% - rather poor indeed. Also I hold this in a registered account, so capital gains do not come into play.

The charts suggest that $5.90 down to $4.22 is from COVID. What would the return be with a market price of $5.90?

Also, the effective purchase price is not $6.31. It is still $8.85. $6.31 is the cost for tax purposes and not the cost for investment return calculations.

December 20, 2020
5:01 pm
Bud
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So reits have to pay out all their rental income less what they need for capital maintenance? Can they build a reserve? They issue equity or debt when they want to expand buy more properties. The structure is sound? Is a real estate corporation like Morguard or Simon Property more secure than a reit? A guy like Mitch Goldhar of Smartc. who has a significant stake why would he choose the reit structure whereas Rai Sahi of Morg chose a corp.

December 20, 2020
6:49 pm
rhvic
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Norman1 said

rhvic said

 I bought Slate in July 2013 at a then price of $8.85 per unit. With the adjustments to cost base over the years, my effective purchase price is now $6.31. The price today on the market is $4.22. My overall compound annual return at this price including distributions and ROC on this investment works out to +0.5% - rather poor indeed. Also I hold this in a registered account, so capital gains do not come into play.

The charts suggest that $5.90 down to $4.22 is from COVID. What would the return be with a market price of $5.90?

Also, the effective purchase price is not $6.31. It is still $8.85. $6.31 is the cost for tax purposes and not the cost for investment return calculations.  

With a market price of $5.90, my annual compound return would be 3.7%, still nowhere near the supposed 10% return rate.

Also, I do regard the effective purchase price as being the original price minus whatever Slate told me is ROC over the years - hence the $6.31 figure, since ROC is supposed to reduce cost base - I see this as a 'refund' of part of the purchase price. As to distributions received, I have subtracted from that column whatever equates to the reported ROC, since that is not really a dividend in my view, simply paying back some of what I paid in the first instance. At least, that is my way of doing the accounting.

December 21, 2020
1:49 pm
Norman1
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rhvic said

Also, I do regard the effective purchase price as being the original price minus whatever Slate told me is ROC over the years - hence the $6.31 figure, since ROC is supposed to reduce cost base - I see this as a 'refund' of part of the purchase price. As to distributions received, I have subtracted from that column whatever equates to the reported ROC, since that is not really a dividend in my view, simply paying back some of what I paid in the first instance. At least, that is my way of doing the accounting.

That's the accounting for tax purposes and not for investment return purposes. There are lots of instances where the two don't match.

Just because one can deduct 4% of a building each year for tax purposes doesn't mean the building has actually deteriorated by 4% each year and no more than 4% each year.

I don't calculate returns using the grossed-up value of dividends received, in spite of the fact that I need to report the grossed-up value and not the actual value of dividends received for tax purposes.

Similarly, I use $7 for cost of some bank shares when I calculate investment returns. I don't use the tax cost of $14 for those shares, which is from artificially crystallizing the unrealized capital gains when the government changed the capital gains exemption rules.

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