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Reit taxation
December 21, 2020
2:24 pm
rhvic
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Norman1 said

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.  

Norman, perhaps I am being simplistic, but I prefer simple. Note that I hold this investment in a registered account, so capital gains do not come into play here.

I use this simple idea for my investments:
total % gain/loss = {(current value of investment+total cumulative dividends-ROC)/(cost base)}-1.
Cost base of course is the total paid for the investment minus ROC.

This can then be calculated over a time period for an annualized compound value.

December 21, 2020
3:41 pm
topgun
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rhvic said

Norman, perhaps I am being simplistic, but I prefer simple. Note that I hold this investment in a registered account, so capital gains do not come into play here.

I use this simple idea for my investments:
total % gain/loss = {(current value of investment+total cumulative dividends-ROC)/(cost base)}-1.
Cost base of course is the total paid for the investment minus ROC.

This can then be calculated over a time period for an annualized compound value.  

I know the original cost of my RRSP bank shares in 1993. $27.875 They split twice 2 for 1. I bought more over the years. Of course I sold some of them. They have a high rate of return compared to my expectations today. Somewhere about 12% annually. Once I get my RRIF I will be selling some annually. Merry Christmas.

Have a Great Day

December 24, 2020
12:02 am
Norman1
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rhvic said

Norman, perhaps I am being simplistic, but I prefer simple. Note that I hold this investment in a registered account, so capital gains do not come into play here.

I use this simple idea for my investments:
total % gain/loss = {(current value of investment+total cumulative dividends-ROC)/(cost base)}-1.
Cost base of course is the total paid for the investment minus ROC.

This can then be calculated over a time period for an annualized compound value.

Unfortunately, that formula gives a number that has nothing to do with rate of return.

When the cumulative ROC distributions approach the original investment, the "cost base" approaches zero and the formula blows up trying to divide by zero.

The formula also gives different numbers when the ROC portion of the distributions changes. That makes no sense. Rate of return is the same when one receives $4 of distributions regardless if they were $4 of income + $0 of ROC or $1 of income + $3 of ROC.

December 24, 2020
1:00 am
topgun
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Peter
How do I create a new thread? I have not found a simple way.

Have a Great Day

December 24, 2020
5:57 am
savemoresaveoften
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topgun said

I know the original cost of my RRSP bank shares in 1993. $27.875 They split twice 2 for 1. I bought more over the years. Of course I sold some of them. They have a high rate of return compared to my expectations today. Somewhere about 12% annually. Once I get my RRIF I will be selling some annually. Merry Christmas.  

The rate of return will be quite meaningless

Norman1 said

rhvic said

Norman, perhaps I am being simplistic, but I prefer simple. Note that I hold this investment in a registered account, so capital gains do not come into play here.

I use this simple idea for my investments:
total % gain/loss = {(current value of investment+total cumulative dividends-ROC)/(cost base)}-1.
Cost base of course is the total paid for the investment minus ROC.

This can then be calculated over a time period for an annualized compound value.

Unfortunately, that formula gives a number that has nothing to do with rate of return.

When the cumulative ROC distributions approach the original investment, the "cost base" approaches zero and the formula blows up trying to divide by zero.

The formula also gives different numbers when the ROC portion of the distributions changes. That makes no sense. Rate of return is the same when one receives $4 of distributions regardless if they were $4 of income + $0 of ROC or $1 of income + $3 of ROC.  

The rate of return in % will be quite meaningless as Norman pointed out. But I think what RHVIC is trying to measure is how well the "true" return of the investment is. In other words, if the ROC nets out the original cost to zero, and still return $X dividend each year, that the asset is performing. But it cant be quantity as a true % return, esp when the ROC embedded in the dividend reduce the cost annually, so the %return changes every year. And on top, what about the reinvestment risk / return on the ROC ?

December 24, 2020
6:50 am
Peter
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topgun said
Peter
How do I create a new thread? I have not found a simple way.  

First, go to the forum in which you want to create the thread, such as https://www.highinterestsavings.ca/forum/general-financial-discussion/

Then, click the "Add Topic" button in the top right or bottom right.

December 24, 2020
7:07 am
Bill
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I agree it's a bit obscure, topgun, because I don't really pay attention to the various forums, I just come to the home page to see what's been posted lately on the various threads (I'm assuming like most people) and from that view you can't tell how to start a new thread. The key, I think, is to first select "Forum" at the top of the home page. (But I never end up starting any new threads because every few months when the urge hits I've forgotten how to do it again!)

December 24, 2020
9:56 am
rhvic
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Norman1, please share your wisdom then as to how you would continuously evaluate an investment such as a REIT or ETF which pays back ROC. How do you judge the performance of an investment which spends most of its time simply paying you back what you paid for it? How do you treat cost base, total of distributions, ROC, etc. to see if the investment is worthwhile? Do you wait until cost base equals zero and then you say the investment is good?

There is certainly something incorrect with an investment such as Slate REIT (SOT.UN) indicating that the distribution rate returns 10% or so - it does not.

December 24, 2020
12:40 pm
Norman1
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Calculate the internal rate of return (IRR). That's what the rate on a savings account would have to be for the same investments, same payouts, and same ending balance. IRR also uses the timings so that it accounts for when the investments and payouts occur.

Spreadsheets function XIRR() that can find the IRR for an irregular sequence of cash flows.

One needs to look at the financial statements to determine whether or not the ROC part of distributions is a return of original investment. It actually doesn't matter for IRR calculations. Any return of the original investment will be reflected in the payouts and the ending value.

If one invests $5, gets a $1 distribution, and gets only $2 when the investment is liquidated, the investment return is the same, regardless of whether that $1 distribution was income or return of capital.

Distribution rate and actual rate of return differences are quite common. Lots of bonds, for example, have that because they trade above face value from the drop in interest rates.

If one pays 102% of face value for a bond, then one will have a lower return than what is calculated by simply dividing the interest payments by the purchase price. There will be a loss at maturity from paying 102% of face value now and receiving only 100% of face value at maturity.

December 24, 2020
1:19 pm
topgun
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I looked at the XIRR() function. Lots of spreadsheet functions that I never used. In the last few years I created a spreadsheet. One column for date. One column for deposits. One column for withdrawals. The current value in another cell. I used the What-if Analysis Goal Seek to find the IRR. I will try XIRR().

Have a Great Day

December 24, 2020
1:50 pm
topgun
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XIRR() may give the same results as the way I did it. I will investigate further.

Have a Great Day

December 24, 2020
2:22 pm
Norman1
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Hopefully, they do arrive at the same number!

There is more than one algorithm to find the IRR numerically. Successive approximation and Newton-Raphson come to mind. All of them should converge to the same number.

December 25, 2020
5:47 am
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I tried XIRR(). With XIRR() it uses the actual dates. Jan 2020 has 31 days. Each month has a different number of days. In my model I assumed that each month is 1/12 year. The function XIRR() gets slightly different value. Not going to affect me. Cool.

Have a Great Day

December 25, 2020
12:51 pm
rhvic
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Well here then is a challenge for you to try to work out the rate of return on my actual example.

I purchased Slate REIT, SOT.UN in July 2013, 500 shares for $4425. It went by the symbol FAM back then, and changed names. This was $8.85 per unit. Current price is $4.18 per unit.

Since then, cumulative reported ROC (return of capital) is $1272.

Cumulative distributions are $2443 (which includes the ROC).

Good luck!

December 26, 2020
3:59 pm
Norman1
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In order to do the IRR calculation, one needs the date and amount of each investment and each distribution.

The total distributions and the time period are not enough.

December 26, 2020
4:29 pm
rhvic
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Norman1 said
In order to do the IRR calculation, one needs the date and amount of each investment and each distribution.

The total distributions and the time period are not enough.  

OK, here you go:

From September 2013 to March 2019, $31.25 paid out per month.
From April 2019 to present, $16.65 paid out per month.

ROC 4/16 $6.82
ROC 4/17 $338.52
ROC 4/18 $375.00
ROC 5/19 $375.00
ROC 4/20 $176.34

Note that in these cases, ROC is not an actual payment into my account - it is a redefining or relabeling of a portion of the previous year's disbursements.

Hope that is what you need.

December 26, 2020
4:37 pm
Bud
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Why dont some reits convert back to corporations to simplify their structure?

December 27, 2020
5:29 pm
Norman1
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rhvic said

OK, here you go:

From September 2013 to March 2019, $31.25 paid out per month.
From April 2019 to present, $16.65 paid out per month.

ROC 4/16 $6.82

ROC 4/20 $176.34

Note that in these cases, ROC is not an actual payment into my account - it is a redefining or relabeling of a portion of the previous year's disbursements.

One can ignore ROC relabeling. It doesn't affect the amount of the cash distribution paid.

Bad news: Your IRR to December 24, with unit price of $4.18, is not significantly different from the number from your formula: 0.46% per annum.sf-frown

In fact, your IRR has been all over the place if one uses the market value of the Slate Office REIT units:

Date Closing
Price
Cumulative
IRR
31-Dec-2013 $8.69 2.49%
31-Dec-2014 $7.58 -2.29%
31-Dec-2015 $7.05 -0.26%
30-Dec-2016 $7.90 5.54%
29-Dec-2017 $8.14 6.97%
29-Jun-2018 $7.62 6.05%
31-Dec-2018 $5.97 2.80%
31-Dec-2019 $5.85 3.22%
24-Dec-2020 $4.18 0.46%
December 28, 2020
10:19 am
rhvic
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Thanks Norman. I checked my spreadsheet, and if I look at one more significant figure in my compound annual return, I too had 0.46% as my rate of return - in agreement with your method exactly (0.455% if you want three significant figures). So my formula appears also to have some validity, as long as cost base is greater than zero.

December 28, 2020
12:06 pm
RAV4guy
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rhvic wrote:
"Well here then is a challenge for you to try to work out the rate of return on my actual example.
I purchased Slate REIT, SOT.UN in July 2013, 500 shares for $4425. It went by the symbol FAM back then, and changed names. This was $8.85 per unit. Current price is $4.18 per unit.
Since then, cumulative reported ROC (return of capital) is $1272.
Cumulative distributions are $2443 (which includes the ROC)."

I have read the other replies to this question and realize it has been well answered above but this is my take. In my spreadsheet program IRR is defined as the Internal Rate of Return for a series of cash flows. In this case the cash flows are the original purchase; -4,425; the income over time; +2,443; and the proceeds; (if 500 shares of SOT.UN were sold at 4.18); +2,090. These cash flows sum to +108. So as everyone knows there is a small postive return.

I have a small PDF file that I would like to upload here that would show my data for my IRR calculation. It will not upload and I do not know where to find the rules for creating a post on this site.

In my spreadsheet I had an initial cash flow of -4,425 for the purchase; then 7 years with annual cash flows of +305 for the income and finally in the last year a cash flow of +2,398 (the last years income of +308 plus the proceeds of the sale +2,090 (500 x 4.18)). The IRR calculated was .78%/year, which is similar to the other answers. I apportioned the income equally over the 8 years 2013 to 2020 which I see is not exact.

As has been stated ROC does not matter for this calculation. ROC is part of the income tax calculation and that information could be used to calculate the after tax IRR if one had the desire to do that.

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